Hryvnia: bottom below forecasts

International financial partners are putting pressure on Ukraine to quickly devalue the hryvnia.

But if the process of weakening the hryvnia is accelerated too much, a large and turbulent river of national currency conversion could turn into a tsunami. Therefore, it is better not to rush. However, this does not guarantee that the dollar will not jump beyond the forecast limits for it this year.

For example, over the past 12 months, the “American” currency has fallen in price by 14% against the hryvnia, which is already significantly higher than the income on hryvnia deposits. But what will happen next...

“Moneychangers” no longer respond to the regulator

On September 6, “money changers” and legal exchangers reacted in a unique way to the strengthening of the official hryvnia exchange rate. Instead of reducing the dollar-hryvnia exchange rate, they raised it. Moreover, they also doubled the usual difference between the NBU exchange rate and their dollar exchange rate. And they were not mistaken, because already at the next auction the hryvnia weakened again against the dollar.

So, the desire to demonstrate to market players a strong hryvnia only leads to accelerated purchasing of currency. And then the hryvnia hits a new local bottom, never to return to the previous one.

At the same time, the American financial information provider for professionals Bloomberg warns that the IMF is demanding that the NBU rapidly depreciate the hryvnia, significantly increase taxes and ease monetary policy against the backdrop of moderate inflation in order to reduce the incredible budget deficit.

Accordingly, the regulator is now looking for a compromise, because such a drastic step could call into question the central bank’s ability to maintain price stability. In addition, the financial system of Ukraine has its own skeleton in the closet. For example, in July, Ukrainians kept UAH 1 trillion 289 billion in banks. Of these, only a third are in dollars and euros. The rest is a hryvnia canopy, which rests only on the interest income of the deposit.

It should be noted here that the current year was unprofitable for hryvnia depositors, given the rapid growth of exchange rates (hryvnia devaluation). After all, with the start of the NBU’s controversial new strategy and the departure from the practice of a fixed exchange rate, the hryvnia devalued by 14%, and, by the way, a 19.5% tax is also calculated on household income from deposits.

At someone else's expense

The stability of the hryvnia is also affected by the electoral race scenario in the United States. Thus, the G7 countries in June agreed on a loan of $50 billion using income from the frozen assets of the Central Bank of the Russian Federation.

According to the plan, the decision was to be finalized by the end of October, before the next president of America was determined. However, today there is no confidence in this project. After all, at the end of the competition between candidates of the two parties, surprises may arise, the economic consequences of which for Ukraine may be unpredictable.

Difficult political processes are also taking place in EU countries. And since no politician can exist without his voter, it is useless to hope for a change in the trend. Therefore, the likelihood is growing that Ukrainian pensioners and state employees will not be paid with funds from American and European taxpayers without a limit in quantity, and most importantly, in time.

That is, external financing will sooner or later become a relatively insignificant bonus, and not the basis of the budget, as it is now. The macroeconomic balance that previously existed in Ukraine has been disrupted over the past two years. Financial partners no longer hint, but communicate quite frankly: learn to live for your own.

It was known that this would happen long before the acute budget crisis. But the safety cushion in the form of gold and foreign exchange reserves is still insufficient. It is not surprising that an emergency search began for internal reserves with the help of which the country and its national currency will be able to survive 2025.

The perfect storm

There are two basic and one intermediate scenarios for the coexistence of two parallel monetary units of Ukraine - the dollar and the hryvnia (the euro fluctuates in accordance with the world Forex).

The first assumes devaluation under the control of the regulator and the relative success of the financial strategy and tactics being implemented now. That is, we are talking about a slow loss of weight of the national currency.

The second involves a monetary shock during a perfect storm. This option, of course, is much less likely, but it also cannot be excluded.

A perfect storm in the foreign exchange market and a rapid collapse of the hryvnia to unpredictable values ​​is possible if several of the following factors coincide:

– a strict demand from financial partners (not publicly, not de jure, but de facto), which will be accompanied by a significant reduction in assistance. After all, the interests of national taxpayers are the prevailing factor in the world;

– the financial needs of the budget are not completely covered, because for 2025 alone, according to officials, we lack at least $15 billion, and so far only Europe and the IMF are among the sponsors and creditors. The total budget deficit is about $35 billion;

– a sharp deterioration in the already poor state of the economy, revenues are stagnating, and expenses are growing;

– further aggravation of the situation in the theater of operations;

– the emergence of problems with the sea corridor;

– depressive trends in the economy associated with the state of the energy sector in winter;

– a psychological factor, sometimes panic is caused by a drop that overflows the cup;

– continuation of the current destructive practices of lobbying and corruption and, as a consequence, insignificant success in finding internal reserves for financing the state budget for the next year. It is the last factor that may have a decisive influence on the hryvnia exchange rate in 2025. After all, instead of actually filling the state budget with literally hundreds of billions, which are now ending up in the pockets of tax officials, customs officials, or are simply transferred offshore due to the refusal to introduce real transfer prices, rental payments, the real cost of renting state property, etc., corrupt officials are trying balance the state budget only by increasing taxes and fees. Although this is simply unrealistic.

Of course, along with the options of controlled slow devaluation or force majeure in the foreign exchange market, there is a conditionally intermediate (between the first and second) third scenario.

Tax burden

The next year will definitely be more financially burdensome for most ordinary citizens and businesses. After all, state budget revenues do not coincide with expenses. Moreover, the imbalance is only growing. Due to expenses increasing at a faster pace. Therefore, 2025 will take place in the paradigm of a constant search for internal cash reserves.

Everyone will feel the new level of price and tax burden on their own wallet. These will be:

– other prices in markets;

– other energy tariffs;

– limited wage growth, which will keep pace with official inflation indicators, but certainly not with real ones;

– higher taxes;

– a different exchange rate between the dollar and the euro, of course, is not in favor of the hryvnia.

Turbulence zone

Dollar/hryvnia: the nearest target is the corridor 42-43. And only for this year.

The IMF expressed its opinions regarding the following periods in the spring and has not yet updated:

• 2024 – 41 UAH per dollar;
• 2025 – 45.8 UAH;
• 2026 – 48.6 UAH;
• 2027 – 50.4 UAH;
• 2028 – 52.1 UAH;
• 2029 – 54.1 UAH.

In the end, the International Monetary Fund's forecast is purely informative and almost never coincided with the actual dynamics of the pair. But this time everything may happen differently. Moreover, the draft state budget 2025 was prepared on the basis of an average exchange rate of 45 UAH/USD.

And the first serious test for the hryvnia (independent of the wishes of the National Bank) may be the morning on the interbank market and the black market after the American exit poll and the subsequent period. There is not long to wait - until Wednesday, November 6, 2024.