Results of May, based on statistics on the impact of the coronavirus crisis (COVID-19) on Ukraine’s economy and the balance of payments, as well as influenced by the positive signal on loan allocation by the IMF, improved our YE 2020 exchange rate based on our forecast model of Ukraine’s balance of payments. We now believe there are no prerequisites for the devaluation of the exchange rate outside the 27.5 – 29 UAH/USD corridor, as we predicted earlier.
This updated forecast provides for the “currency corridor” through the YE 2020 between 27.5 – 28.5 UAH/USD.
As a sample Full June Report is available with a one-month lag
Ukraine Economic Outlook’s (UEO) calculations for June, presented in more detail in this report, show the hryvnia will continue its “soft” revaluation trend that began in March-April, from 26.8 – 26.3 UAH/USD.
With high probability, the public disclosure of information on the “final decision” on the allocation of the IMF tranche will provide for a smooth revaluation rate curve trend. The rate will later strengthen against the background of positive news for the market up to 26.2 UAH/USD.
The most probable calculated value of the exchange rate on July 1, 2020 is within the corridor 26.1-26.3 UAH/USD.
UEO also analyzed all fundamental factors influencing the exchange rate and the balance of foreign currency demand and offers in the country, which changed to the reverse (with a trend towards strengthening the hryvnia exchange rate). Our review was based on our own analysis of external payments, obtaining external loans (primarily the IMF), new terms of foreign trade (both for export-import of goods and services, and for transfers by “labor migrants”).
Having studied the scenarios for the implementation of the monetary and exchange rate policies of the National Bank of Ukraine (NBU) this year, we received clear signals that the regulator now has much more room for maneuver, compared with 2019. According to preliminary results of May, consumer inflation in Ukraine slowed down to 1.5%-2% yoy, despite an increase in the monetary base in March-May by UAH 85-90 billion, (+20%) – up to UAH 550 billion (preliminary estimate).
Based on the pattern observed in April-May, the main channel of the primary issue was the overflow of bank assets from certificates of deposit to hryvnia-denominated government bonds (OVDPs). In parallel, the net balance of foreign exchange interventions by the NBU in April amounted to $787 million, in May – $660 million and in the first week of June – already $411 million.
Due to the fall in energy prices and the global deflationary trend, the regulator has the opportunity to pursue a soft monetary policy while supporting the ability of the Finance Ministry to implement budget expenditures, while restraining exchange rate fluctuations, in particular, the revaluation trend, in weak corridors of volatility (this situatuation is unlike in 2019, when the hryvnia was strengthening, and it was necessary to contain the Consumer Index prices at the 5% target).
Under conditions of a surplus of the balance of payments until September, this will inevitably create “permanent revaluation pressure” on the exchange rate. At the same time, despite a significant increase in cash in circulation (M0 + UAH 50 billion) in March-May, the regulation of which is most complicated for the NBU, this did not put significant pressure on the foreign exchange market.
On the contrary, an increase in the level of redistribution of GDP through the budget (inevitable during the crisis) and support for the most vulnerable segments of the population have changed the general mask of spending by increasing the demand for cheap essentials of domestic producers and artificially suppressing demand for cash currency (as a form of savings) and imports.
Therefore, we abandon two probabilistic scenarios of our forecast for the hryvnia exchange rate movement made in the May report on the basis of a “tougher” and “softer” monetary policy of the NBU, heretofore referred to as Scenarios A and B. Our model of forecasting the impact on the balance of payments rate and money supply by the NBU in 2020 gives us the opportunity to “remove” the uncertainty factor.
According to our current forecast, the hryvnia exchange rate for December 31, 2020 will be 28.2 UAH/USD (with probable deviations in the “currency corridor” of 27.5 – 28.5 UAH /USD).
We are also improving our April assessment of the forecast of the consolidated balance of payments of Ukraine in 2020 from “positive” $900 million to “positive” $1.4 billion (taking into account the receipt of external financing in the amount of at least $4 billion from the IMF and other institutional lenders before the end of the year). NBU foreign exchange reserves at the end of the year will amount to $27 billion.