Hryvnia's renewed vigor in 2021

In the first days of the new year, the national currency began to gradually strengthen after sliding towards the end of 2020. Experts say that the basic economic factors are favorable for the hryvnia and predict it will be relatively stable in the near future.

The end of 2020, dramatic in many respects, was a bit nervous for the hryvnia, but after the New Year holidays the situation calmed down, and every day the national currency keeps gaining a few kopiykas.

In the last month of 2020, the national currency fluctuated within a one-hryvnia range, while demonstrating some strengthening in mid-December.

At the beginning of December, the hryvnia exchange rate against the U.S. dollar reached UAH 28.63. However, then the Ukrainian currency began to regain positions, and by the middle of this month the dollar dropped below UAH 28, the minimum value being at UAH 27.74 at the official rate. Until the end of the month, however, the hryvnia weakened somewhat and ended the difficult 2020 at the level of UAH 28.27 per dollar.

Despite the economic crisis caused by the coronavirus epidemic, the hryvnia successfully passed last year's tests.

bank.gov.ua

Economy experts believe that, in general, the factors influencing the hryvnia exchange rate have been and remain favorable.

According to them, the conditions for the stability of the national currency ensured an increase in prices for Ukrainian exports on the world market and a recovery in non-residents' demand for domestic government bonds.

In addition, in December it became known about the launch of the long-awaited mission of the International Monetary Fund set to review the Stand-By Arrangement. Confidence in Ukraine on the part of international financial partners always favorably affects the exchange rate of the national currency against the euro and the dollar.

Favorable factors

The past year was a shock for the world and national economy as a whole, but not for the Ukrainian currency though.

According to forecasts by leading Ukrainian economists, the coming year promises to be calm for the hryvnia – the national currency rate is expected to remain the current level of UAH 28 to the U.S. dollar.

According to chief economist at Dragon Capital, Olena Belan, early this year, foreign exchange earnings are expected to increase as a result of a sharp rise in prices for steel and grain in the last months of 2020.

"This, along with the inflow of foreign capital into government bonds, will help strengthen the hryvnia. But in the second half of the year, the rate will return to the level of UAH 28/USD due to the growth of imports," Belan said.

Oleksandr Martynenko, head of the corporate analysis department at the ICU Group, noted that the hryvnia is supported by strong external accounts.

bank.gov.ua

"High activity of exporters and an increase in foreign capital inflows will contribute to a moderate strengthening of the hryvnia in the first half of 2021. A further transition to a current account deficit will put pressure on the exchange rate in the second half of the year, and it should end 2021 in the range of UAH 27.5-28/USD," Martynenko said.

Return to growth

In the first days of 2021, the hryvnia began to strengthen again after a relative pre-New Year decline. As of January 14, the Ukrainian currency at the official exchange rate reached UAH 27.97/USD.

RoboForex analyst Andriy Hoilov told UNIAN that the current strengthening is due to a drop in demand for foreign currency on the part of importers and the need for exporters to sell currency on the interbank market. According to him, the beefup would have been stronger if not for the purchase of foreign currency by the National Bank on the interbank market.

Hoilov also said that after the Ministry of Finance attracted almost UAH 9 billion on domestic government loan bonds auction on January 12, Ukraine's internal debt exceeded UAH 1 trillion.

"This growth was caused by the suspension of cooperation with international financial organizations last year and the need in this regard to seek financing from domestic lenders. The Cabinet is paying off this debt in the national currency, the hryvnia exchange rate is affected only by the demand of non-residents for government bonds. The latter sell currency on the interbank market for their purchase. At the end of last year, they resumed purchases of this instrument. Therefore, we expect further inflow of foreign currency from them," the analyst said.

Hoilov noted that a different situation is being observed now with the external debt.

"Ukraine must pay the IMF $1.6 billion, but in total our country will have to transfer $15.5 billion to creditors. Ukraine is able to make these payments – for example, last September we paid out more than $2 billion in one payment. However, without the help of international financial organizations it will be very difficult and will lead to devaluation of the national currency," the analyst said.

Importance of working with IMF

According to Hoilov, the beginning of the review mission's work in Ukraine and the results of this work in the near future will determine the exchange rate of the hryvnia against the euro and the U.S. dollar.

"Until the end of January, I expect further correction of the U.S. dollar rate against the hryvnia to the level of UAH 28.30. The European currency against the hryvnia is likely to strengthen to UAH 34.65," the expert said.

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Forex Club analyst Andriy Shevchyshyn noted that the hryvnia exchange rate on Wednesday, January 13, tested the strength of the UAH 28 per dollar level, which the day before prevailed only thanks to the NBU, which came out with the currency purchase.

"On the market, a significant preponderance of currency sellers remains in place, which leads to a significant strengthening of the hryvnia. Importers on the market are passive due to quarantine. Speculators are playing on expectations of the hryvnia strengthening. At the same time, an important role on the market is played by non-residents who are guided by the purchase of government bonds," Shevchyshyn wrote in his blog.

The analyst also called the start of the IMF mission's work in Ukraine an important factor in supporting the hryvnia.

"This year, Ukraine should transfer to the Fund about $1.6 billion worth of scheduled payments. Of this, $1.36 billion will be used to pay off the principal amount of debt, and $260 million – on interest. Taking into account payments on the debt of private, as well as inter-company debt, the total volume of payments by Ukraine in favor of non-residents in 2021 will amount to about $15.5 billion," the analyst said.

According to Shevchyshyn, the national currency has entered a stage of rather active growth and may soon strengthen below the psychological mark of UAH 28 per dollar.

The pace and range of strengthening will depend on the National Bank, which remained the only strong buyer on the market, where all other participants are waiting for its interference with a purchase to understand the new level of trading, the analyst said.

Most likely, the new year will bring no serious trials to the hryvnia if the authorities pursue a healthy and balanced economic policy on the way to recovery from crisis. That's unless, the year 2021 brings us another surprise – after the events of the past year, we must be prepared for the most unexpected cataclysms.

Kateryna Zhyriy

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