Now both the NBU and the IMF, world rating agencies and investors, business and the general public are thinking about assessing real currency risks. How to lay straw?
Going to the bank is like going to work
Now both the NBU and the IMF, world rating agencies and investors, business and the general public are thinking about assessing real currency risks. How to lay straw?
A simple example. Despite the record volumes of currency in accounts with the NBU, there is still a ban (introduced at the beginning of hostilities) on the daily limit for cash withdrawals in banking institutions - no more than the equivalent of 100 thousand UAH. There is no talk of even softening this limit (at least in hryvnia). And it concerns the population.
Therefore, those citizens who intend, for example, to purchase housing for themselves (after losing it due to the war), need not even weeks, but months to receive their funds previously deposited in a bank account.
Obviously, the reason for maintaining the limits is that the regulator is afraid of force majeure circumstances when everyone (as already happened in the spring of 2022) will need access to their accounts at the same time.
And such an expectation does not look strange, taking into account at least the latest IMF forecasts. The International Monetary Fund recently updated its economic forecast for Ukraine. His negative scenario (in which the war will end before the end of 2025) suggests that due to the intensification of the war, the shock to the Ukrainian economy will begin in the second quarter of 2024.
In turn, a partial default is predicted by the global agency Fitch Ratings (London). Fitch has affirmed Ukraine's long-term foreign currency issuer default rating (IDR) at CC. Below are only default and bankruptcy. And this is subject to the likely restructuring of commercial debt in foreign currency.
In hryvnia the rating is CCC-. The reason is macro uncertainty caused by the war.
The international rating agency S&P Global Ratings also has not optimistic expectations, which downgraded the long-term sovereign credit rating and issuer rating in foreign currency of Ukraine to CC from CCC, the forecast is negative. The agency also accepts the possibility that it will subsequently downgrade the rating to SD (selective default).
When exactly force majeure circumstances occur depends on external assistance. More precisely, from its significant reduction. For now, due to foreign currency receipts in Ukraine, they are being postponed. First from the second quarter to the fall. Now from autumn to next year.
By the Turkish lira?
If at the end of 2021 the US dollar was only a little more than 8 Turkish liras, then as of March 2024 the lira had devalued fourfold in just two and a half years, to more than 32 liras/dollar. The example of its neighbor does not inspire Ukraine very much.
The too long period of low rates of the Turkish Central Bank with high inflation played a cruel joke on the lira. Because when Turkey sharply doubled the discount rate last year - from 8 to 15%, it did not affect anything.
February inflation showed a shocking 67% per annum. In the meantime, the fantastic increase in the discount rate to 50% in March of this year is not helping much - the dollar against the lira has only stopped.
Turkey's economic realities are not only caused by the policy of too low interest rates in the past. There were other serious reasons.
- Geopolitical risks (conflicts in the Middle East, especially the Syrian direction).
- Inflationary and devaluation psychological expectations.
- Active and very significant central bank interventions.
- Repeated significant increases in the minimum wage.
- Supporting the national currency with tight monetary means.
- Investor distrust in an unpredictable economy.
- Distrust of the population.
- Natural disasters.
- A balance of payments balance that results in a currency shortage.
It is easy to notice that some of these reasons are somewhat reminiscent of Ukrainian ones. The main difference is that there is a war in Ukraine, and while the partners are helping to balance the state budget with their flow of dollars and euros.
What is the main danger? The delayed effect of the currency spring, which once worked in Turkey, may also work in Ukraine. Because if the external financing received this year is not enough and it does not level out the budget imbalance for 2024, then in the second half of the year we will have to look for additional sources for the budget. Otherwise, force majeure cannot be avoided. And as we see in the example of Turkey, the discount rate, which the National Bank of Ukraine most likely relies on, does not always save the situation.
Therefore, it is no coincidence that the NBU continues a moderate, controlled devaluation of the hryvnia, although it now has quite enough foreign exchange reserves. And the partners are so far compensating for the lack of receiving “social benefits” from the United States quite reliably.
We think readers have noticed that since the launch of the new currency strategy with greater exchange rate flexibility (beginning of October 2023), the hryvnia has already lost significant weight, losing 10% of its weight on the interbank market. But no one is stopping her from losing weight further, say, to the level of 41-43 UAH per dollar at the end of this year.
The threat of force majeure has shifted to 2025
Thus, in the first quarter of this year, economic and exchange rate stability was maintained. Moreover, as of April 1, Ukraine’s gold and foreign exchange reserves updated their historical record – $43.763 billion.
But if in other conditions the record growth of the currency treasury would have contributed to an incredible recovery in the economy (rapid strengthening of the national currency, optimism of domestic and foreign investors, rapid development, incredible consumer and business optimism, cheap loans, etc.), now the country’s markets have accepted positive currency information is quite cool.
Hryvnia has taken two steps forward, one step back, and continues to do so. This means that, despite the currency in the NBU’s reserves, the threat of force majeure has not gone away. Therefore, without external assistance, we will face serious problems in the economy. Despite the fact that based on the results of the first three months of the year, receipts to the single treasury account even slightly exceeded cash expenses, and tax and customs officials exceeded revenue plans.
And this despite the fact that neither the government nor the NBU have a decisive influence on the volume and frequency of external receipts. They were and remain the main component in the economic equation of Ukraine. Therefore, the threat of financial and general economic problems will continue to haunt the country, moving through time.
Accordingly, the risks that economists emphasize in their forecasts (for example, the risks of underfunding of social sectors) have not gone away. Now they have simply moved on to the following periods: timely payment of wages to 500 thousand government employees and 1.4 million teachers, as well as payments to 10 million pensioners, depend mainly on our partners.
Therefore, there are serious risks that in the event of a lack of external revenues, for example, social payments will still be made more or less in a timely manner, but also with the help of a printing press. However, the risks of such a scenario this year are still moderate. Because today it is no longer 2024, but 2025 that looks decisive for economic and exchange rate stability.
