What will happen to the hryvnia exchange rate after change of the head of the national Bank

Что будет с курсом гривны после смены главы Нацбанка

Change of Chairman of the Board of the National Bank and a number of statements of the first persons of the state have already devalued Ukrainian currency by 3% during the month.

The words of President Vladimir Zelensky that the rate of 30 UAH per dollar will solve the chronic problems with filling the state budget and a positive impact on companies exporting can become a self-fulfilling prophecy.

On the background of devaluation expectations of Ukrainians fled to the banks and exchangers, spurring quotes to 28 hryvnia for a dollar. However, in the last week of July there is a change of trend towards revaluation.

What happens in the currency market now – fading panic or calm before the storm? What will be the policy Kirill Shevchenko and his new profile Deputy, kasatelno of the hryvnia?

As Smoliy put entrepreneurs on the knees

July 8, 2020. Chernivtsi. Zelensky, the President conducts regular meeting with business representatives in the framework of the working visit to the regions.

The CEO of one of the largest Ukrainian manufacturers of clothes, “trembita” Stella Stankevich complains Zelensky on too strong hryvnia exchange rate in 2019.

“You fired it, Smoliy… He last year brought us to our knees. We lost on the strengthening of the hryvnia 13 million. At the same launched products to € 300 thousand more than in 2018. It simply can’t happen”, – toiling entrepreneur.

The main argument of the inadmissibility of the high exchange rate – not competitive salary.

“I have previously worked 3000 people, now 700. And where do you think they are now? In Greece, Italy, Spain. My company decent wages. But I could pay people more,” – said Stankiewicz.

Zelensky hears similar complaints during each working trip. In an interview, up President said that, in most cases, decision making relies on perception and opinion of “ordinary people”.

Then, in Chernivtsi, the President said that because of the high rate of hryvnia Ukrainian company “earned millions and was closed”.

“The fact that millions of hryvnia fell short of the company due to this course and closed – it’s true. We struggled with it from the very beginning of my term, in the summer of 2019… Yes, we support the independence of the National Bank, but… how can we live, even if we have the budget calculated at the rate of 30, and the torque you see what we have. We were told that is the market conditions, the Bank shall be independent… “, – complained Zelensky.

The head of state said that “does not want to characterize the situation” with the resignation of Yakov Smoliy, but hinted that all entrepreneurs “understand” the situation.

“I’m glad you are with us on the same side,” said Zelensky businessmen and promised “to stabilize the situation with the course”.

Chronicles pressure

On the side of the President are other “heavyweights”. The Minister of economic development, trade and agriculture Igor Petrashko criticized the policy of the former head of the NBU, and a strong exchange rate, which was observed in 2019, called “artificial phenomenon, created for speculation,” and “the cause of the crisis in the economy and industry.”

“The course was used for manipulation. We understand that in the past year, the strengthening of the exchange rate to 23.5 hryvnia to the dollar, in fact, laid the fall of our industry and of GDP,” – said the Minister.

In his opinion, in 2019, the NBU is not enough redeemed currency to replenish the reserves by allowing the hryvnia to strengthen. According to the Minister, the fluctuations brought the margin of the productive sector to the unproductive.

“The yield on government bonds at that time were running high and reached 30%, in the absence of risk. How could you let this happen? Took the money, a course for manufacturers, farmers, without any reason, has not joined the reserves when he had the chance to replenish, ” said Petrashko.

In addition, Petrashko accused the NBU at too high a level of interest rates in the interests of “certain structures”. “We understand why the NBU kept the rate high for speculation in the market of government bonds and things like that… From the structures that have worked closely with the National Bank, it is known to all,” said he.

The hryvnia at the rate of 28 per dollar Petrashko called “comfortable” for business and industry. Next year, the economy Ministry forecasts the average annual rate of 29,1 UAH per dollar.

Accounting for the macroeconomic forecast for 2021, Ministry of economic development, trade and agriculture has estimated that the strengthening of the hryvnia with the forecast of 29.1 to 28 USD per dollar will reduce growth in real GDP compared to the baseline scenario by 0.2 percentage points. At the rate of RS 27 per dollar reduction in the economy will grow as much as 0.5 percentage points.

Chairman of the parliamentary Committee on Finance, tax and customs policy Danil Getmantsev believes that the gradual devaluation of the hryvnia to 30 per dollar together with other supporting actions to stimulate the economy.

“If to speak about the hryvnia, in the opinion of many experts, it is overvalued in the range of 10%. This is a question that needs to solve the national Bank, But nothing wrong with gradual, slow drawdown of the hryvnia within 10%, I personally do not see, ” said Getmantsev.

However, he noted that he sees no reason for uncontrolled emissions or sharp devaluation. “It’s not in the intentions of the head of the NBU, and this is not the intention of anyone of us,” he said.

During the presentation of the new head of the NBU Kirill Shevchenko on the profile Committee of the Verkhovna Rada before the vote Getmantsev said: “Inflation will not be uncontrolled emissions will not be the independence of the NBU will be saved.”

Prime Minister Denis Shmyhalou had to repel the attacks on suspicion of encroachment of government on the independence of the new head of the NBU.

First, he has declared to journalists that does not discuss with the leadership of the national Bank the rate of 30 UAH per dollar.

“We are interested in the development of the industry, we are interested in investment, but it is not the subject of discussions regarding special the emission of means, and not the subject that needs to be artificially low or high. Rate is regulated by the market”, – said the Prime Minister.

The second time Smegal already publicly tried to convince Western partners that the government is not negotiating with the NBU on “the printing of the hryvnia” – during the last working visit to Brussels.

“We do not discuss the issue of the hryvnia, moreover, to what extent. We once spoke, once again assured the Commission that the NBU will remain independent, fulfilling its strategy,” said Smigel.

The reasons for the growth rate

Deputy Chairman of the Board of the national Bank Dmitry Sologub explains the reduction of the hryvnia to the dollar in July, the psychological factor.

“The fundamental reasons no, on the contrary – the situation is quite favorable. Fluctuations primarily related to the statement that the hryvnia will weaken,” he notes.

Analysts agree with the member of the Board of the National Bank.

“The deterioration in devaluation expectations was largely provoked by the President on the best course to budget at 30 UAH per dollar, and statements of the leaders of the economic Committee of the Verkhovna Rada on the need issue. The replacement of the head of the NBU was only an additional catalyst,” says the head of the Department of macroeconomic research of the ICU group Serhiy Nikolaichuk.

“Personnel changes in the NBU and the statement Zelensky formed fears that the Central Bank may lose its independent status and will transition to the fixation of exchange rate on the fulfillment of wishes the country’s top leadership,” added Ahtyrka of Concorde Capital.

While experts do not note any changes in the behavior of the national Bank on the currency market. The regulator still allows the rate to fluctuate in both directions, while smoothing excessive fluctuations through intervention.

“Psychological factors superimposed on the seasonal decline in foreign exchange earnings from agricultural exports. Signs of change in policy of the NBU in the foreign exchange market is not visible, but this is not surprising, since the change of management Board member responsible for this area, occurred just a few days ago,” – said the chief economist of investment company Dragon Capital Olena Bilan.

When words are worse than actions

The study, which was conducted by the Professor of the University of California, Berkeley Yuri Gorodnichenko and Professor at the Kyiv school of Economics Solomiya Shpak, proves that the public statements about the weakening of the hryvnia is not less important than the actual devaluation.

“Such statements affect inflation expectations of enterprises. In turn, inflation expectations are directly related to inflation and expectations concerning the hryvnia exchange rate and GDP growth”, – stated in the results of the study.

“If you tell people that the national currency depreciated by 10 percentage points (from 27 to 30 UAH per dollar), most likely, it will lead to an increase in expected inflation 3 percentage points – and it’s a lot”, – the researchers note.

Scientists also do not see the connection between devaluation and export growth.

“It is often said that the weak national currency will allow you to “spread your wings “exporters. But the same survey of the NBU shows that managers with higher inflation expectations often expect the macroeconomic downturn. Simply put, they regard inflation as a bad omen.

So – reduce your investment, reduce staff and are reluctant to hire new workers. In addition, they expect growth of spending, so can raise prices, thus triggering the “spiral inflation,” the researchers said.

Inflation hits the poor segments of the population. In order to restrain her, the NBU will be forced to raise interest rates. This will reduce the possibility of lending business and may lead to economic slowdown and even recession, say the economists.

“Policy makers need to be very careful in choosing words to guide the economy and keep calm markets,” declares Gorodnichenko and Shpak.

Profile Deputy Sologub says that the exchange rate policy of the regulator will not change. “NBU will also continue to smooth out excessive fluctuations,” – said the Deputy Chairman of the NBU.

However, about a possible change of policy of the national Bank on the official exchange rate of hryvnia in the direction of greater devaluation may indicate that replacement of the relevant Deputy Chairman of the Board. Is Oleg Churia, who for five years oversaw the exchange direction, the Deputy Shevchenko became the native of the Ministry of Finance Yuri Gelati.

The task of the Ministry of Finance to look for money to fill budget – the opposite of different from the objectives of the National Bank. Ideally, these structures should form a system of checks and balances that will not allow either hyperinflation or stagnation of the economy. Will Geletii the government to take control of the formation of the hryvnia? Experts say that such a development is unlikely.

“Execution of the revenue part of the budget is not a mandate of the national Bank. We hope that Gelati will perform tasks within the scope of activities of the national Bank” – the analyst of investment company Concorde Capital Eugene Ahtyrka.

During the week 13-17 July, when the new head of the Department became Kirill Shevchenko, the regulator does not intervene in the interbank foreign exchange market. The rejection of intervention then recorded for the first time since September 2018. In those days the official hryvnia exchange rate fell by 32 kopecks – from 26.95 to 27.27 per dollar. July 1, when Yakov Smoliy announced the resignation, the hryvnia was 26,67 per dollar.

Shevchenko on his first briefing to the media said that he sees no reason for intervention in the situation on the currency market.

“We see no limit of intersections of the dimensions of the course in order that the national Bank had to react to these fluctuations. Fluctuations are within normal,” he said.

In the end, from 20 to 24 July, the national Bank did not allow further devaluation of the national currency and sold reserves of 348 million dollars to support the hryvnia.

Forecast for the near future

What will happen with the hryvnia in the near future? Representatives of investment companies allow the devaluation of the hryvnia to 29 per dollar.

“In its June forecast, we provided a gradual weakening of the autumn to the level of 28-29 hryvnia per dollar. As can be seen from the last days, the hryvnia is moving to this range faster,” said Nikolaichuk.

“Will they stop the hryvnia in these positions or devaluation will be deeper up largely from the actions of the new leadership of the NBU and how to change his policy”, – added in the ICU.

“Traditionally, devaluation pressure intensified in the autumn. We expect that the exchange rate will weaken and by the end of the year will reach 28,5 UAH per dollar. Our forecast assumes that the stream of negative news affecting the situation on the currency market, the increase will not,” say analysts at Concorde Capital.

In Dragon Capital predicted that the hryvnia will weaken to 28 UAH per dollar by the end of this year. But promise to revise the forecast in the direction of a deeper devaluation, “once there is more clarity on how it will look policy of the NBU”.

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Vladimir Zelensky
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