Movement of hryvnia exchange rate: 2019 results and 2020 outlook

Key drivers of hryvnia strengthening in 2019

The National Bank of Ukraine (NBU) considered economic implications of an exchange rate below UAH 24/USD and concluded that serious imbalances and risks are present in the foreign-exchange market.

Hryvnia exchange rate in 2019

The hryvnia is driven up by the following factors:

– A record gain in grain yield in Ukraine. The largest-ever crop of grains and oilseeds was seen in 2019;

– A rise in labor productivity, particularly in agriculture and the food industry;

– A drop in world prices for oil and natural gas;

– A continued increase in money transfers from

– Ukrainian citizens working abroad;

– A free-floating exchange rate regime;

Source: NBU

– A stable inflow of money from non-residents into hryvnia-denominated government debt (domestic government loan bonds);

– Oversupply of foreign currency;

– Moderate growth in imports of goods;

– Moderate repatriation of foreign-currency dividends abroad.

Hryvnia strengthening: short- and long-term results.

The strengthening of the national currency gave rise to numerous discussions in the NBU and the Finance Ministry, but future policy is still vague. The IMF has provided no clear recommendations either.

Further growth in the hryvnia exchange rate against the dollar would imply “screwing up” exports and pushing the trade balance further into the red. Lowering its rate by significant National Bank interventions and creation of a foreign exchange deficit may sharply drive up prices and inflation.

The significant appreciation of the hryvnia in 2019 played a dirty trick on both exporters, who report a decline in foreign exchange revenues to the country, and the National Bank. The latter incurred UAH 12.3 Bl of losses in the first nine months of 2019. 

At the same time, the trade balance of Ukraine is increasingly negative. Imports have surged and become cheaper in hryvnia equivalent. Exports in physical terms remain unchanged or even somewhat rose, at least regarding grain and oilseed commodities (export efficiency decreases!).

Many economists and producers have called strengthening the hryvnia through foreign investment into domestic government loan bonds “irrational”: the NBU is not fully aware of risks posed by the situation and does not use other tools for maintaining macroeconomic stability.

A strengthening hryvnia and inflation.

On December 12, 2019, the National Bank Board decided to reduce interest rate to 13.5% per annum from December 13, 2019. The NBU accelerates loosening of its monetary policy because a strengthening hryvnia rapidly eases inflation pressure.

The rise in the hryvnia exchange rate caused a faster reduction of inflation to a target 5% than the NBU predicted in October.

Inflation slowed down substantially because of both a strengthening hryvnia and improved inflation expectations. These factors offset the upward impact on prices from stable consumer demand along with lower production of some vegetables.

October-November 2019: new hryvnia strengthening factors.

In October-December 2019, foreign currency oversupply resulted mostly from Ukrainian export revenues, in particular owing to a record high production of grains and oilseeds, and from sale of foreign currency gained by state-owned companies.

The inflow of foreign investment into hryvnia-denominated government bonds continued, but unlike the previous months, it had no decisive influence on the foreign currency market.

Forecast for exchange rate behavior.

Forecasts for the 2020 hryvnia exchange rate by various agencies range from UAH 24.80 to UAH 28.20/USD.

Factors weakening the hryvnia

Hryvnia weakening is likely throughout 2020 due to the following factors:

– A drop in foreign exchange inflow from agricultural exports;

– A decline in export demand for iron ore and metal products;

– Uncertainty or possible escalation of the conflict in Donbas. This is one of the most important factors for foreign investors;

– A possible decline in demand for Ukrainian domestic government loan bonds from foreign investors;

– Uncertainty about a new agreement on transit of Russian gas;

– The IMF’s decision to provide a new tranche to Ukraine;

– Stakeholders and exporters are potentially not interested in a strong hryvnia because a weak national currency increases their price competitiveness.

In 2020, the above-mentioned factors as well as some other ones could not only pull the hryvnia down, but also adversely affect the entire economic situation in Ukraine.

UkrAgroConsult