Bankers upbeat about prospects for hryvnia exchange rate in February
IMF mission and the recovery of exports are factors that will affect the exchange rate in the near term (Photo:NBU)
Neither household demand for foreign currency nor increased imports of energy equipment shifted the hryvnia exchange rate in January, and bankers quizzed by NV Business were upbeat about the upcoming IMF mission and foreign aid to support Ukraine’s currency in February.
The National Bank of Ukraine (NBU) is confident that the planned amount of international support of Ukraine and the positive dynamic in relations with the International Monetary Fund (IMF) will allow it to receive more than $38 billion of funding in 2023.
"It allows us to avoid financing the 2023 state budget deficit by emission and to maintain international reserves at a sufficient level, even in the face of continued high security risks,” the NBU said of the expected incoming aid.
“International reserves are expected to reach about $27 billion by the end of 2023 and continue to grow.”
Meanwhile, the NBU has, as expected, further increased the banks' obligatory reserves. Starting on Feb. 11, the NBU will increase the required reserve ratios for demand deposits and current accounts of legal entities and individuals by 5 percentage points. The ratio was also increased for deposits and current accounts of other non-resident banks and loans received from international (other than financial) and other organizations, in particular, from 5% to 10% in national currency and from 15% to 20% in foreign currency.
A further rise of the required reserves ratios is expected in March.
As the NBU expects, all of these measures and the maintenance of foreign currency reserves at an acceptable level will reduce the hryvnia surplus in the banking system.
"This, in its turn, will encourage banks to actively compete for depositors' money...” the NBU said.
“As a result, the currency market will become more resilient to situational factors, and the National Bank will be able to ease administrative restrictions (fixed hryvnia exchange rate) for businesses and households in the future.”
What influenced the hryvnia exchange rate in January
In January, seasonal factors affected the exchange rate as usual, in particular the decrease in business activity during the Christmas and the New Year holidays, poorer weather conditions (which limits export shipments), as well as rising devaluation fears.
Oleksandr Pecherytsyn, head of research at Raiffeisen Bank Ukraine, told NV Business that "all these factors, first of all, reduced trading volumes in the foreign exchange market, and secondly, shifted the imbalances between supply and demand more towards a currency deficit.”
"Energy equipment imports increasing in the face of possible blackouts is also worth mentioning,” Pecherytsyn noted.
“It forced the NBU to actively invest in the market to avoid shortage of foreign currency.”
Anton Boldyrev, the director of the Treasury and Investment Services Department of JSC Ukreximbank, stressed that the cash exchange level remained at about UAH 40.50 per dollar all through January.
"The option given earlier by the NBU to purchase non-cash foreign currency on deposit continues to positively affect both the demand and supply of foreign currency from households, which is likely to have mitigated the impact of the hryvnia's seasonal tendency to weaken at the beginning of the year,” Boldyrev believes.
According to Pecherytsyn, the demand for cash foreign currency increased in early January as individuals were buying foreign currency with money they had earned at the end of 2022.
"However, the supply in the Ukrainian currency market was boosted by the EU's decision to provide EUR 3 billion ($ 3.3 billion) in macro-financial assistance at once, which strengthened the NBU's reserves and allowed it to balance the market,” Pecherytsyn noted.
“As a result, short-term devaluation fears were eased."
Boldyrev believes the seasonal export business drop off also allowed the NBU to increase the amount of investments. The NBU's net sales of foreign currency in January declined to $2.7 billion from $3.2 billion in December.
"However, I think the growing role of the NBU in the market does not pose significant devaluation risks for the hryvnia, as the inflow of international financial assistance allows to maintain foreign exchange reserves at a sufficient level," Boldyrev said.
Market activity picked up slightly In the second half of the month, but FX sales remained limited due to delays in inspections of Ukrainian ships carrying agricultural products for export. Therefore, the NBU remained the only source for covering the market's FX shortfall.
The IMF influence
The next IMF mission is expected in Ukraine in February. It may result in a transition from monitoring to financing. According to Bloomberg, the IMF may approve a new program of financial support for Ukraine worth $16 billion as early as in March.
"The International Monetary Fund is exploring a multiyear aid package for Ukraine worth as much as $16 billion to help cover the country's needs and provide a catalyst for more international funding while Kyiv tries to repel Russian forces" Bloomberg wrote.
Upon the approval of this three- or four-year-plan, Ukraine will be able to receive $5-7 billion in the first year.
"There's hope the plan will be agreed on by the end of March, with the first tranche coming as early as in April in the best-case scenario,” the message reads.
According to Vitaliy Vavryshchuk, the head of the Macroeconomic Research Department in Investment Capital Ukraine Group, the launch of the IMF finding program is strongly desirable even in case other international financial assistance and credits will be sufficient for funding the state budget needs.
"We should consider the cooperation with the IMF as a kind of insurance against unfavorable developments and increased need for external financing,” Vavryshchuk said.
“For example, it could be a hedge against the possibility of military costs increasing significantly, or some budget revenues being lower than planned. In this case, the IMF can react flexibly and adjust the program to Ukraine's needs.”
Bankers interviewed by NV Business are positive about the upcoming IMF mission.
"We can see the fulfilment of our obligations to the Fund even now. It has already become better with the government’s domestic FX debt liabilities rolling over, with management of Naftogaz (the largest national oil and gas company of Ukraine), tax improvement etc.,” said Boldyrev.
Pecherytsyn believes the IMF funding program is likely to be launched as early as the first half of 2023.
"However, I doubt the potential amount of funding has been already decided, as well as the amount of funds that may be allocated for the current year,” he said.
“I think the amount of the credit will be settled in spring depending on other international funding and grants to be provided to Ukraine, as well as the Ukrainian budget needs estimations at the moment of audit. It's highly likely that new loan inflows from the IMF will significantly exceed Ukraine's repayments to the organization, unlike the previous year.”
What will affect the hryvnia exchange rate in February
Bankers believe the exchange rate will remains at level of UAH 40.50 per dollar during February.
The factors that will contribute to the hryvnia strength are the following: expected stabilization of the grain export corridor and thus the recovery of export flows, a gradual decline in power generators imports, and the rhythmic flow of international aid.
"Also, in the absence of new geopolitical risks, devaluation fears in the cash market may remain low. Therefore, we do not see any major reasons (at least for now) for significant exchange rate fluctuations in February," said Raiffeisen Bank’s Pecherytsyn.
According to Boldyrev of Ukreximbank, their baseline scenario does not foresee significant fluctuations in the FX market, especially given that last week the NBU confirmed that there were no grounds for re-pricing the exchange rate and announced a further gradual tightening of the requirements for banks' mandatory reserves on customer accounts.
"In the long run, this may stimulate the improvement of the attractiveness of banks' deposit products, redirecting part of the foreign currency demand of the population into hryvnia assets,” Boldyrev said.
“However, we may see an increase in tension over a possible escalation of the situation at the front line, which may become a factor of increased demand from the population.”
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