May – Monthly Update For Current Year 2020 Exchange Rate Forecast

We stick by our exchange rate forecast for the end 2020 in the UAH 27.5 -29.0 UAH/USD corridor, taking into consideration the results of April – the first month after the exchange rate “bounce” following the “March rally” and stabilization of Ukraine’s interbank currency market. 

Exchange Rate Forecast (2020), 04.05.2020

As a sample Full May Report is available with a one-month lag

Our group’s forecast calculations, which will be presented in more detail in this report, show that during the first two weeks of May the hryvnia will continue the “soft” revaluation trend that began in April – from UAH 26.85 to UAH 26.60/USD. There is one proviso, however. If on May 20-23 receipt of the first tranche from the IMF is delayed, expectations in the foreign exchange market will deteriorate significantly and the hryvnia may “unravel” to UAH 27.7/USD by the end of May and the first week of June. The general mood among investors could be “exacerbated” by payment of UAH 3 billion in hryvnia-denominated domestic government loan bonds (OVDPs) on May 27-30 if they are used to shore up to a noticeably “weakened” (in terms of volume) foreign exchange market and to make payment on $1.1 billion on government Eurobonds scheduled on May 29

The foreign exchange market will further be unsettled due to the fact that the government had about $1.67 billion in foreign currency accounts at the end of April. Repayment on May 13 of $334 million in foreign currency bonds and $1.1 billion in Eurobonds will force the Finance Ministry to urgently raise foreign currency at auctions. This, in turn, will lead to an even greater skew of demand over supply in the foreign exchange market.

It is more likely, however, that by this date a public announcement will be made on the IMF’s “final decision” on tranche allocation. If affirmatory, this would maintain the smooth rate revaluation trend. Under this scenario, the exchange rate (Scenario “B”) will strengthen against the backdrop of positive news for the National Bank to UAH 26.2 UAH/USD.

The most probable calculated value of the exchange rate on June 1, 2020 is UAH 26.1-26.3/USD.

Our group also analyzed all fundamental factors known to us which could influence the exchange rate to a changed, opposite balance (with a trend towards strengthening of the hryvnia exchange rate) of supply and demand of foreign currency in the country. This includes analysis of external payments, obtaining external loans (primarily from the IMF), and new terms of foreign trade (both for export-import of goods and services and for transfers of “labor migrants”).

We also looked at new fundamental factors that became apparent this month – capital inflow and outflow to/from Ukraine and, most importantly, National Bank (NBU) monetary policy. This is the basis on which we present two probabilistic scenarios of the hryvnia exchange rate movement until the end of the year, depending on a “harder” or a “softer” NBU monetary policy (Scenarios”A” or “B”).

Under the most probable scenario, according to which the NBU conducts a “tougher” monetary policy, the budget deficit will be financed mainly due to external borrowings (Scenario “A”). Under this scenario, we forecast that the hryvnia exchange rate on December 31, 2020 will be UAH 28.2/USD (with probable deviations in the UAH 27.7-28.7/USD currency corridor).

Under the less likely scenario, according to which the NBU conducts a “softer” monetary policy (if the regulator has to “take over” the bulk of the financing of the budget deficit, instead of using IMF currency, by providing more than UAH 60 billion to banks for refinancing OVDPs (Scenario”B”), we forecast that the hryvnia exchange rate on December 31, 2020 will be UAH 31.8/USD (with probable deviations in the UAH 31.3-32.3/USD currency corridor).

We are also changing our March assessment of the forecast of the consolidated balance of payments of Ukraine in 2020 from “negative” at $1.5 billion to “positive” at $900 million, according to the results of the year (taking into account external financing from the IMF in the amount of $8 billion) and the balance sheet of the NBU’s foreign exchange reserves at the end of the year in the amount of $26.4 billion.

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