Monday, April 21, 2014

Financial Commentary - Economic developments in Ukraine

Ukraine: economic worries and hopes

Amid disturbing military developments in
Ukraine, where Russia has effectively started its intervention, Canadian Ukrainians may also want to keep track of economic developments in the country. The exchange rate of the hryvnia (UAH) to the U.S. dollar (USD) is the major concern for Ukrainians at the moment due to high dollarization of the nation’s economy. The hryvnia started depreciating in 2013 from the level of around UAH/USD 8.15. In early 2014, this depreciation began to accelerate on the back of the exhaustion of the National Bank of Ukraine’s hard currency reserves which dropped from USD32 billion in early 2012 to about USD 15 billion currently. Last week, the rate on the interbank market reached an all-time high of UAH/USD 13.4 while in retail exchange booths it reached as high as UAH/USD 14.2.

Along with raising costs of bank loans in hard currency (which constitute around 40% of all retail loans in Ukraine), this drove up prices for many consumer discretionary and staple goods due to the high level of imports. Last week, the NBU, which had been under heavy fire from the media, applied drastic measures to curb the hryvnia’s weakness.  On Tuesday, the NBU accused 14 banks of deliberately buying dollars at any price (the ungrounded rumor is that these banks were acting for Russian interests) and disconnected them from the interbank currency exchange. As a result, by the end of trading last Wednesday, the hryvnia appreciated to UAH/USD 11.4 on the interbank exchange and remained at this level by the end of the week.

Some analysts are currently estimating a “fair” exchange rate at around UAH/USD 10.0. Whether the market rate will support this level, will, in particular, depend on how soon Ukraine obtains foreign financing. Recently, the NBU’s governor was in the U.S. where he discussed further financing from the International Monetary Fund. The chances for this financing are considered high. In the meantime, the World Bank has decided to issue a USD750 million loan to Ukraine in May to support the state budget. Ukraine is currently holding talks with different international financial organizations about investment projects for a total of USD1.6 billion.

By: Ukrainian Credit Union Limited

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