In November, the NBU reported a decrease in the volume of gold and foreign exchange reserves. This happened due to the active interventions of the NBU in the interbank market, because the National Bank actively entered the market with a supply of foreign currency to satisfy demand. Is the National Bank preparing to reduce foreign currency sales and how will the foreign exchange market behave at the end of 2023?
During October, the growth rate of consumer prices slowed down in Ukraine. The NBU says that this happened due to the further expansion of the supply of food products and the preservation of a stable situation in the foreign exchange market. “To maintain moderate inflation, the NBU will continue to ensure sufficient attractiveness of hryvnia assets and maintain an active presence in the foreign exchange market,” the NBU said. Meanwhile, since October 3, a regime of managed exchange rate flexibility has been in effect in Ukraine, which was introduced by the NBU by decree No. 121 of October 2, 2023. What was the impact of the new exchange rate on demand in the foreign exchange market, why did the National Bank reduce the period for the mandatory return of foreign exchange earnings to 90 days, and will the hryvnia devalue in the interbank and cash markets?
Reserves are declining: how much currency is the National Bank selling?
As reported by the National Bank, as of November 1, 2023, Ukraine’s international reserves, according to preliminary data, amounted to $38.97 billion. In October, reserves fell by 1.9%. This is explained by the NBU’s interventions and Ukraine’s debt payments in foreign currency.
“The increase in interventions is primarily due to the situational increase in demand for currency in the first days of the transition from exchange rate fixing to a regime of managed exchange rate flexibility. Thus, from October 2 to October 6, the net sale of currency by the National Bank on the foreign exchange market amounted, according to balance sheet data, to $1.15 billion; the NBU sold almost half of this volume on the first day of the new exchange rate regime. Subsequently, the NBU’s interventions on the sale of foreign currency stabilized to the level that was observed before the transition to managed exchange rate flexibility,” the regulator said in a statement.
“The fall in reserves was expected. The fact is that the expected external assistance did not materialize, which means the NBU was forced to “burn” reserves without being able to restore them. Let us recall that in October there was a transition to controlled flexibility of the hryvnia exchange rate. As a result, the NBU’s interventions in October turned out to be the largest for the entire year - $3.33 billion,” says financial analyst Andrey Shevchishin.
Meanwhile, Anton Kurinnoy, a dealer in the global markets department of OTP Bank, is also confident: the decrease in NBU reserves is directly related to the introduction of controlled exchange rate flexibility, because due to the new rules, the National Bank sought to avoid panic, and therefore sold a lot of currency from reserves.
“There is a direct connection here with the introduction of a flexible exchange rate and an attempt to prevent panic from engulfing the population due to a possible strong increase in the currency. Therefore, the NBU strengthened the hryvnia, but this all happened at the expense of international reserves, and we believe that this practice of actively strengthening the national currency will begin to reverse. That is, reserves will begin to be spent less actively. If new assistance from international partners does not “come in”, then the reserves may slowly decrease, but there is an agreement with the partners, so for now the regulator is in comfortable conditions to contain the weakening of the hryvnia,” Kurinnoy noted in the conversation
Although the NBU strengthened the hryvnia, this happened at the expense of international reserves, and now there is a possibility that the hryvnia will begin to gradually devalue
Experts believe that after a surge in demand in October, the situation on the interbank market should stabilize during November.
“Given such a surge in demand in October, we should expect a slightly smaller foreign currency deficit in November, and therefore the volume of NBU interventions. I think that by the end of this month the rate of reduction in gold and foreign currency reserves will be significantly less,” Anna Zolotko, director of the treasury operations department of Unex Bank, told Focus.
And according to Taras Lesovoy, head of the treasury department of Globus Bank, since the beginning of November, supply has dominated over demand on the interbank market, which immediately affected exchange rates - they began to decline.
The expert named several main reasons why the supply of foreign currency on the interbank market increased in November, while demand fell:
- the period for returning foreign currency earnings was halved (from 180 to 90 days for agricultural exports);
- the possibility of currency “flowing” from the interbank market to the cash market and vice versa;
- increasing the limits on the purchase of foreign currency by citizens with its mandatory placement on deposits (conversion deposits);
- increasing the cash sales limit by the amount of balances as of April 13, 2022;
- the ability of citizens to buy non-cash currency in banks in the equivalent of up to 50 thousand UAH;
- fears of devaluation of the hryvnia prompted citizens to stock up on foreign currency, the need for which has now significantly decreased.
“However, we must understand that the market is “live”, so it is quite possible that changes in the relationship between supply and demand will occur over time. The market will not be static. The regulator can either increase or decrease the size of interventions (based on past weeks, we can assume that the step of such a decrease or increase will be $50-60 million), thus providing more “freedom” to the interbank market. Accordingly, the current exchange rate will change,” says Taras Lesovoy.
Anton Kurinnoy noted: in November the regulator sold $950 million - this is a fairly standard average amount of interventions ($400-500 million per week). “On the interbank foreign exchange market of Ukraine, demand is now stable,” says Kurinnoy.
Anna Zolotko also speaks about the stabilization of the demand situation. According to her, the first ten days of November differed significantly from the classic picture of October: the volume of supply increased significantly, demand decreased significantly. Therefore, the need for NBU interventions has decreased.
Given the surge in demand in October, we should expect a slightly smaller foreign currency deficit in November, and then a reduction in the volume of NBU interventions
“Basically, this is a natural result of increased devaluation expectations that increased after the change in the exchange rate regime. Importers tried to speed up the contracting of new batches of goods as much as possible; exporters, on the contrary, held back the sale of proceeds, hoping for an increase in the exchange rate. But it never happened. Ultimately, in early November, the supply of currency on the market increased, and the volume of demand decreased slightly. Therefore, last week a very moderate indicator of weekly NBU interventions was recorded - $389 million. For comparison, on average during this year, the NBU sold $520 million per week on the ASU,” said Anna Zolotko.
Cash dollars and euros: will the population’s demand for foreign currency increase?
There were no noticeable sharp fluctuations in the cash foreign exchange market in mid-November, because there was no increase in demand for cash dollars. Experts say: there is no rush, but the difference between the interbank rate and the cash rate will remain in the future.
“Cash is moving behind the interbank market, but rather restrainedly and slowly, perhaps a little artificially, because both large players and the population are holding the currency until new social payments (employee salaries, social assistance, etc.). The cash market is in short supply of the hryvnia resource, so we will not see a sharp increase. After moving by 37.5 UAH/USD. the rate fell back to 37.75-37.8 UAH/USD, in particular due to the fact that the interbank exchange rate stopped at 36 UAH/USD. and walked discreetly in the opposite direction. Most likely, the cash and non-cash markets will maintain a gap between quotes,” says Anton Kurennoy.
According to Anna Zolotko, there is no reason to expect an increase in the cash exchange rate of the dollar yet. In particular, due to the option available to the population to buy non-cash currency through banking applications.
“A strong deterrent is non-cash channels for purchasing foreign currency by the population. Here recently there has been a tendency towards increased competition between banks. Already 47 institutions from 64 solvent banks offer clients to buy non-cash currency within the limit of 50 thousand UAH. This forces banks to improve offers for customers, reducing the cost of non-cash currency. On the one hand, this encourages more and more Ukrainians to buy currency in non-cash form, which directs part of the demand from the cash market to the non-cash market. On the other hand, part of the currency purchased in this way ultimately ends up on the cash market in the form of supply, because the difference in rates even allows you to earn a little money on such operations,” explained Anna Zolotko.
Taras Lesovoy also says that there will probably be no chaotic exchange rate swings on the cash market during November.
“The cash rate is now formed taking into account the interbank rate with an average of 1-1.5% added to the rate from the interbank rate. Accordingly, we can say that chaotic changes in the cash market, divorced from the interbank market, are hardly possible. Increasing opportunities for citizens to buy foreign currency (conversion deposits, increasing limits on the purchase of cash in banks, etc.) have satisfied the demand to a certain extent and keep cash rates at a “foreseeable” distance from interbank rates. And over time, it is quite possible that the difference between non-cash and cash rates will begin to decrease to 1-0.7%,” the expert believes.
Exporters have less freedom: why did the National Bank decide to shorten the period for returning proceeds?
In November, the National Bank, by resolution of the Board of the National Bank of Ukraine dated November 10, 2023 No. 145, made an important decision for the foreign exchange market to reduce the period for the mandatory return of foreign currency earnings to Ukraine from 180 to 90 days. The corresponding decision, according to the NBU, is intended to strengthen the discipline of compliance by subjects of foreign economic activity with the deadlines for settlements for transactions for the export of goods and to ensure the return of foreign currency earnings within the established deadlines for settlements for certain transactions for the export of goods. However, we are not talking about all exports, but only about agricultural goods, because at the level of 90 days the deadline for settlements for operations on exports of the following goods was established: wheat, rye, barley, oats, corn, soybeans, rapeseed, sunflower seeds, soybean oil and sunflower oil, rapeseed oil, cake.
Experts interviewed say this decision did not come out of nowhere. After all, in this way the National Bank is trying to speed up the return of exporters’ funds to Ukraine, that is, to fill the foreign exchange market with dollars and euros in order to increase the volume of supply.
“Firstly, the implementation of such a decision can be considered an important element of “saturating” the market with currency in order to prevent the useless “burning” of the NBU’s foreign exchange reserves. Secondly, we remember that the “managed flexibility” regime is in effect, which provides for “soft” regulatory intervention in the non-cash market in case of emergency. In fact, reducing the period for returning foreign currency earnings is one of the measures taken by the regulator to increase supply,” says Taras Lesovoy.
The National Bank is trying to speed up the return of exporters' funds to Ukraine, which will help fill the foreign exchange market with dollars and euros, and, accordingly, increase the volume of supply
According to Anton Kurinny, the trigger for the NBU’s decision could have been the October trends on the interbank market, when there was a decrease in the volume of supply on the market. “But it should be taken into account that the new deadlines will apply to transactions concluded after November 11. Therefore, the effect of this decision may be noticeable closer to February,” the expert warned.
As a result, according to experts, reducing the period for returning foreign currency export earnings is aimed, first of all, at increasing the supply of foreign currency on the interbank market. But such a decision may not have an impact on the strengthening of the hryvnia exchange rate.
“The NBU is trying to reduce pressure on reserves and reduce interventions, especially in the case of less assistance from partners. Meanwhile, I do not expect that the changes will support the hryvnia; rather, they will support the NBU and reserves. And the main factor - a large deficit in the trade account and balance of payments - will keep devaluation expectations elevated,” Andrey Shevchishin noted.
