Igor Mazepa, CEO of Concorde Capital investment company, comments on the current situation with the hryvnya exchange rate
Ukraine’s national currency, the hryvnia, strengthens when supply of foreign currency exceeds demand on the local market. Obviously, the main source of “excess supply” on the market became foreign currency that non-residents brought to Ukraine with the goal of buying Ukrainian bonds denominated in hryvnias – comments Igor Mazepa, financial expert, investment banker and CEO of Concorde Capital investment company.
Only in July, the amount of Ukrainian bonds in the portfolios of non-residents grew by UAH 17.8 bln. It has swelled by UAH 67.7 bln since the beginning of 2019.
On the other hand, the situation with the current account of the balance of payments in the year’s first half was relatively positive. Import growth rates were moderate, while agricultural exports supported the growth of overall exports at a solid level – says Igor Mazepa.
The current level of interest rates, amid conditions of a stable or strengthening hryvnia, makes Ukrainian bonds a very promising investment. Regardless of the Ministry of Finance of Ukraine, reducing rates for quite an extended time, the interest of non-residents in buying Ukrainian paper has not fallen. Such a situation can continue through the year end, and revaluation is still possible -says Igor Mazepa.
Today alone, the hryvnia will strengthen to beyond UAH 25/USD.
Concorde Capital’s analysts expect a significant weakening of the hryvnia in the fourth quarter of 2019. In the second half of 2019, traditional growth in the trade deficit will occur. Other than that, a new political cycle will begin and investors will become more careful. It can’t be ruled out that non-investors could find dangerous signals in the actions of the new government, and that will lead to reduced volumes of their Ukrainian bond purchases, or even a complete halt. No matter what happens, Ukraine is a country with high investment risk, and purchases of the paper of such countries among foreign investors usually close very quickly if something doesn’t go as it should.
In comparing the current situation with 2008, the situation on the ForEx looks somewhat similar. The current excess supply in foreign currency is predominantly related to a single source. As mentioned earlier, this source can quickly vanish and the situation can change dramatically. If the reversal is swift, this can cause panic in the market and a fast pace of devaluation.
There is apprehension that the hryvnia’s strengthening could also lead to the government getting relaxed. For example, ideas can surface of pausing talks with the IMF in the expectation that the situation on the ForEx will further allow the National Bank to replenish its reserves at the expense of purchases of foreign currency on the market. And that will enable making payments in foreign currencies without the involvement of demanding foreign creditors.