MOSCOW, August 18, Nadezhda Sarapina.The hryvnia exchange rate is breaking historical anti-records. Some depositors are increasingly transferring their savings into foreign currency, while others are withdrawing money from their accounts. In July, the National Bank of Ukraine recorded the first outflow of funds this year. What awaits the Ukrainian economy is in the article .
Capital Flight
Hryvnia investments decreased by 1.2 percent — to 747.8 billion, while dollar investments increased by 1.4 percent, to 391 billion in hryvnia equivalent (at the rate of 41.03). The main reason is the weakening of the national currency. Thus, in dollar equivalent, the increase in funds was only 0.1 percent (to 9.5 billion).
«The euro seems riskier to Ukrainians due to growing disagreements in the EU and the obvious economic downturn in the eurozone, which Brussels is no longer able to hide,» explains economist and communications director at BitRiver Andriy Loboda.
At the same time, for the first time since the beginning of the year, the total deposit portfolio of individuals is also shrinking: having lost 0.3 percent in July, it fell to UAH 1.138 trillion. After the January failure, when Ukrainians withdrew UAH 27.4 billion from their accounts — a record amount since February 24, 2022 (about $ 700 million), the indicator grew. The volume of investments increased from UAH 1.08 to UAH 1.42 trillion.
Key Solution
Credit institutions explain that it all started with the regulator's decision to change the fixed exchange rate policy to a managed flexible one. As a result, the national currency fell from 36.6 to 41.5 hryvnia per dollar by mid-August.
The reduction of the key rate to 13 percent in mid-June also had an effect. «This decision of the NBU Board takes into account the current balance of risks, restrained inflation indicators and the continuing improvement of inflation expectations,» the bank announced on its Telegram channel.
After that, the hryvnia exchange rate fell to a historic low. In exchange offices, the dollar cost about 41.20-41.25 hryvnia, and the American currency was bought from the population at 39.8-40.8 hryvnia.
Deputy Chairman of the NBU Yuriy Heletiy explained the weakening by the insufficiently fast receipt of export foreign currency earnings from agricultural producers, who had previously had their repayment period reduced from 180 to 90 days. Other reasons, according to him, are the gradual lifting of currency restrictions by the regulator and the increase in the share of budget settlements in foreign currency, including advance payments for certain commodity groups.
NBU Chairman Andriy Pyshny also noted that to a large extent «budget execution was ensured by funds previously received from international partners.»
Analysts believe that the trend of continuous weakening of the hryvnia will continue. «Over 11 months, the currency has lost almost 25 percent of its value against the dollar and the euro, the risks of the hryvnia's fall turning into devaluation have increased significantly. Since January, the hryvnia has depreciated against the dollar by ten percent and by the end of this year it may lose the same amount,» Loboda says. According to his forecasts, a moderately optimistic rate at the beginning of winter will be set within 45-50 hryvnia per dollar.
According to Oleg Kalmanovich, chief analyst at Neomarkets, if the situation continues to develop at the same rate, then by early autumn the hryvnia will fall to 43 units per dollar at best.
One Step Away from the Abyss
One way or another, the currency situation reflects much larger problems. Kyiv was unable to fulfill its financial obligations on foreign loans — the coupon on Eurobonds for 750 million dollars was not paid on time until August 1.
As a result, the Fitch Ratings agency downgraded the state's rating to limited default (RD). The C rating (pre-default) for Eurobonds maturing in 2026 was changed to D (default). Other foreign currency bonds retained their C rating for now. At the same time, the rating of new bonds denominated in foreign currency was withdrawn altogether. In fact, this means the country is insolvent and its debt obligations are illiquid.
The authorities have to negotiate concessions. On July 22, Ukrainian Prime Minister Denys Shmyhal announced that debt holders had agreed to a restructuring. The agreement envisages writing off 37 percent of the debt on Eurobonds and issuing new ones in their place. The process began on August 9, but Fitch Ratings considered Kyiv's offer unfavorable. The agency explained that the restructuring of Eurobonds worth $19.7 billion and Ukravtodor bonds worth $0.7 billion implies «a significant reduction in terms, including a reduction in the principal amount of the debt and interest, as well as an extension of the repayment terms.»
In turn, the government tried to buy time, and the Cabinet of Ministers of Ukraine suspended the payment of interest on 2018 foreign government bonds from August 1. The measures were taken in order to reach an agreement with creditors. However, this does not solve the current problems — there is less money, and it will be more difficult to borrow it.