Strengthening spree: What Ukrainians should expect from hryvnia

The hryvnia kicked off this February with a confident strengthening, forcing the dollar to drop below a UAH 28 mark. According to experts, in the coming months, objective market factors will ensure reliable support for the Ukrainian currency.

The hryvnia exchange rate early February accelerated its strengthening against the dollar. Since mid-January, the national currency has gradually been beefing up by a few kopiykas, and in the first days of February, the dollar sank below the UAH 28 mark. The start of the second week in February saw the official exchange rate fixed of UAH 27.77 to the dollar.

The trend towards hryvnia strengthening prevailed despite the almost three-week January lockdown.

Oleh Ustenko, adviser to the President of Ukraine on economic issues, noted that many enterprises continued their operations uninterrupted because the restrictions mainly concerned the service sector, while the situation on foreign markets contributes to the inflow of foreign currency into the country.

The current strengthening of the national currency rate is due, first of all, to seasonal factors.

Minister of Finance of Ukraine Serhiy Marchenko told UNIAN there is now a typical seasonal strengthening of the hryvnia.

"Prior to the sowing campaign, as a rule, many exchange currency for the purchase of fuel, fertilizers, seeds. We are a large agricultural country, so this is a typical seasonal factor. This is a temporary phenomenon, because literally two weeks ago there was a different trend," Marchenko said.

The minister also advised Ukrainians not to pay much attention to the current rate and its periodic fluctuations.

"I recommend that everyone not to pay attention to the exchange rate, since there is no reason why the exchange rate cannot be stable. It will be stable – it was last year, too, despite crisis. There was a somewhat speculative attack in March ahead of quarantine, but it was temporary. The reserves of the National Bank are more than sufficient to maintain the hryvnia exchange rate, and we see no macroeconomic reasons for the deterioration of the exchange rate dynamics," the minister said.

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Objective reasons for strengthening

In addition to the seasonal trend, many experts also note global factors, due to which a favorable situation is developing on the Ukrainian foreign exchange market.

According to Oleh Ustenko, a number of different factors are affecting the current national currency rate.

"Firstly, this is the state of foreign markets, which is now actively improving, in particular, the prices for the groups of goods Ukraine exports – metals and agricultural products – have been on the rise. This means that Ukrainian exporters will start bringing more foreign exchange earnings into the country. And the additional supply of foreign currency on the market will create pressure on foreign currencies and help hryvnia strengthen," said the presidential adviser.

Secondly, Ustenko says, the inflow of foreign currency to Ukraine is increasing due to the credit resource, which can be traced by the growth of Ukraine's international reserves – now being largest in the last ten years.

He recalled major raising of funds by Ministry of Finance at domestic bond. This means that part of the buyers brought currency into the country and converted it into hryvnias. Thus, as per Ustenko, grounds are being created for the strengthening of the national currency.

REUTERS

Optimistic outlook

According to forecasts by the Ministry for Development of Economy, Trade and Agriculture, in 2021 the national currency rate may reach UAH 28.6 to the U.S. dollar.

Most economic experts at the end of last year predicted the hryvnia exchange rate in 2021 with fluctuations in the range of UAH 27-29.5 to the U.S. dollar. This is facilitated, among other things, by the intensive activity of exporters due to favorable conditions on foreign markets, due to which the country gets foreign currency inflows.

President of the Univer Investment Group, Taras Kozak, noted that two traditionally difficult months for the hryvnia – December and January – are already behind. Before the New Year holidays, he says, the state is actively paying contractors, so significant amounts of hryvnia are thrown into the economy, while part of these funds goes to the foreign exchange market, putting pressure on the Ukrainian currency rate.

"Seasonal strengthening of our national currency usually begins in February. Hundreds of large agricultural enterprises, which keep export earnings in foreign currency, bring dollars to Ukraine and sell them to prepare for the spring field works. Farmers need to do the repairs and maintenance of their agricultural hardware, purchase fuel and seeds, fertilizers and plant protection products. This is in addition to an inflow of constant foreign exchange earnings from the exporters of iron ore and metals, whose prices have increased dramatically in recent months," Kozak wrote on his blog.

He noted that the flow of funds from our employees, who, despite the quarantines, successfully work abroad and transfer part of their earnings to their families in Ukraine, does not decrease either.

In addition, the expert said that the treasury accounts of the finance ministry have enough currency in them to cover external debt payments without additional borrowing and without the IMF help. Moreover, foreign portfolio investors are rapidly increasing the volume of government bonds – ovr a month and a half, they bought government bonds worth UAH 20 billion.

Kozak sees no reason for the hryvnia to weaken in the coming months.

"There are no reasons for hryvnia weakening on the six-month economy horizon. In my opinion, in the coming months there will be a tendency for the hryvnia to strengthen on the foreign exchange market. You can expect the national currency rate in the range of UAH 27-28/ USD, as per the basic scenario. It is unlikely that we will see the mark of UAH 26/USD, although the actual real exchange rate right now is somewhere around there, according to my estimates. The National Bank will not allow the hryvnia to beef up too much in order not to be criticized by exporters," the expert said.

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Debt repayment no hindrance to exchange rate

Hryvnia strengthening last week went on against the backdrop of the first large payment in 2021 by the Ministry of Finance to the International Monetary Fund. The analyst with Robo Forex, Andriy Hoilov, told UNIAN that the IMF had received from Ukraine about US$652 million, while at the same time the dollar significantly weakened against the hryvnia – the NBU had to intervene in the interbank market with the purchase of surplus currency. Larger payments are due in September: then the amount will exceed $2 billion

The analyst notes that there are additional factors for the strengthening of the Ukrainian currency.

"This week, the Ministry of Finance will hold an auction for government bonds. The market will be offered bonds maturing in six, 12, 18, 24 and 36 months in hryvnia, as well as 12 months – in U.S. dollars. Foreign currency bonds are popular with non-residents. The latter are actively increasing their investments in these securities: since year-start, their total portfolio has grown by UAH 11.7 billion. Such volume of dollar supply on the interbank market can further strengthen the hryvnia," said Hoilov.

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Favorable situation on world markets

The existing rends on world markets have a beneficial effect on the hryvnia exchange rate. Serhiy Fursa, a specialist with the Dragon Capital investment firm, noted that there is an excess of spare money in the world at the moment.

"At such moments, foreign investors are ready to believe in Ukraine and believe in the hryvnia, and are prepared to actively buy up hryvnia-denominated government bonds. As a result, we see an active purchase of government bonds by non-residents. They come in, sell their hard-earned dollars, buy hryvnia, and then buy bonds with it," Fursa wrote in an oped.

The analyst also emphasized that there is now a favorable situation for Ukraine on the global raw material market.

"On the one hand, there's recovery of global economy and trade war between Australia and China, from which Ukrainian steelworkers and miners are gaining. This helps certain football teams play better and at the same time leads to higher export earnings, which means support for the hryvnia. On the other hand, issues with crops in 2020, when the weather wasn't too good, including in Ukraine, led to an increase in prices for wheat and corn. So these dollars also flow into Ukraine," wrote Fursa.

As a result, he said, there is a trend towards national currency strengthening, which will continue amid the absence of resistance from the National Bank.

"How long can this go on? For the coming months, that's for sure. Unless, of course, the weather changes on world markets. Closer to the second half of the year, other issues will become relevant. In particular, Ukraine's cooperation with the IMF. Which seems to be in place right now, but still there's no money. So far, this suits investors. Moreover, they are more than complacent under the pressure of extra money. But the closer September and external debt payments are, the more questions they will start asking," the analyst noted.

Experts are unanimous in their opinion about the stability of the Ukrainian currency in the near future, and, apparently, Ukrainians will not have to get nervous and run to exchange offices so far. There is complete stability on the forex front.

Kateryna Zhyriy

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