Corona crisis no obstacle to hryvnia: what to expect next

Ekaterina Zhiriy
23:10, 18 May 2020
Economy
414 0
Opinion

The coronavirus pandemic and the ensuing global economic crisis have dealt a serious blow to almost all economies worldwide and the well-being of most people. Economists call the ongoing crisis much more severe than any global economic storm known to mankind.

A distinctive feature of economic issues traditional for Ukraine has always been a sharp fall in the national currency. This was the case in the 1990s, in 2008, and in 2014, when the hryvnia rapidly depreciated, leaving Ukrainians sobbing over the savings lost.

After the coronavirus hit Ukraine this spring, it was expected that the hryvnia, which had abnormally beefed up late last year and remained at around UAH 23-24 to the dollar in winter months, would once again collapse.

In recent weeks, the national currency either remained stable or strengthened

But no rapid fall happened. In March, at the peak of public anxiety and uncertainty, the national currency rate was expected to decline, but not critically – to UAH 28 to the dollar. Against the background of hryvnia plunge by 50 percent or more in previous crises, such a decrease is almost invisible. And in recent weeks, the national currency either remained stable or strengthened. For a month already, at the official rate, it hasn't breached the mark of UAH 27 per dollar, and with each day in May, it keeps regaining several kopiykas from the U.S. dollar.

This was partly due to the balanced policy of the National Bank, which in March sold more than $2 billion on the foreign exchange market in order to calm the excessive demand for foreign currency and smooth out fluctuations in the rate. This resulted to such demand returning to a pre-quarantine level, as well as to hryvnia stabilization.

Also, the contributing factors to the slight strengthening were the decrease in energy prices, the crisis-related decline in imports, as well as moderate inflation.

The current situation with the exchange rate is understandable, but any average Ukrainians are always concerned about what to expect next because they are used to reserve more trust for firm foreign currency, while remaining wary of their hryvnia.

Various scenarios are possible: as the pandemic suddenly hit the whole world, any long-term economic and, especially, forex forecasts are a no-go. Even in winter, with the hryvnia gaining strength, most experts predicted a bright future and further growth. And then came the coronavirus…

In Q3, once quarantine bans are lifted, the economy will relaunch toward a rapid recovery

Now, after the weakening of quarantine, the Ukrainian economy is taking small steps towards a gradual recovery by allowing some enterprises and businesses to resume operations. According to current forecasts by the NBU, the economic situation in Q2 will be the worst in recent years, but as early as Q3, once quarantine bans are lifted, the economy will relaunch toward a rapid recovery.

If we suggest that the worst days are already behind and at the same time the hryvnia was only lightly affected and is already regaining positions, then in the absence of possible shocks, Ukraine's currency should remain at its current level where it fluctuates slightly around UAH 26-27 to the dollar.

Another stabilizing factor would be the assistance from the International Monetary Fund. Ukraine has fulfilled the preliminary conditions required so the new program, designed to save the country from default, is spoken of as an almost accomplished fact.

By the end of May, Ukrainian authorities expect to receive from the IMF more than $1 billion, while the total amount of assistance will be over $5 billion. Also, the IMF approval of a decision on further cooperation with Ukraine will greenlight financial assistance from other international partners: the European Union has already announced readiness to allocate half a billion euros.

External assistance, avoiding default, and covering the increased state budget deficit, should also increase Ukraine's reliability in the eyes of the global financial community. And this, in turn, will allow the exchange rate of the national currency to gain a foothold in its current positions without sharp jumps – or maybe even strengthen

However, there are some less optimistic scenarios. According to forecasts of some international institutions, a serious drop in GDP, a decrease in exports, and international remittances will not leave hryvnia any chances to stay as strong so as early as this year it could plunge 25% against the dollar. This scenario also has the right to life, because the powerful blow of the coronacrisis to the world economy cannot go unnoticed, and Ukraine's currency has always been sensitive to such shocks.

But whether the situation will develop in this way remains an open question. According to this pessimistic forecast, the hryvnia will return to the level that preceded its sharp strengthening in late 2019, that's at UAH 29-29.5 to the dollar. And at that time, not everyone appreciated the growth of the hryvnia positively, since the slide of the dollar affected Ukrainian exporters, while ordinary citizens felt no real relief, since neither the prices in stores nor the utility tariffs decreased.

Therefore, in the current conditions it is more important to prevent the impoverishment of Ukrainians and to preserve jobs and development opportunities for businesses. Meanwhile, Ukrainians are quite accustomed to adapting to the exchange rate fluctuations in a stormy ocean of crises.

Kateryna Zhyriy

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