Ukraine's hryvnia currency, which has lost 65 percent of its value against the dollar since the start of 2014, will be far more stable in 2016 but will remain under pressure from weak foreign currency inflows and a trade deficit, a Reuters monthly survey showed on Friday. Eight out of 16 forecasts obtained by Reuters from 15 banks and institutions see the hryvnia at 25-32 per $1 by the end of next year compared to Friday's opening 23.30. The median forecast was 24.8, the mode was 24.5 and the lowest was 23. One source supplied two forecasts.
"Due to the inflationary spike of late 2014 and early 2015 ... the (hryvnia's) fundamental value has been shifting from undervalued to overvalued," analysts at InvestCapital Ukraine said in a note. "During 2016, the hryvnia is set to weaken alongside its fundamental value ... By year-end (2015), the hryvnia should be 25/USD, moving to 32/USD at the end of next year."
The analysts suggested that the overvalued rate would create a further negative impact on Ukrainian exports, the only source of foreign currency supply on the local market now. Exports, of which agrarian and steel products make up about 70 percent, shrank by almost 33 percent year-on-year in the January-October period, mainly due to a global slump in commodities prices.
Imports, which have become expensive and unaffordable for many people, have fallen more sharply than exports, significantly reducing the trade deficit. But in October that trend was reversed: the monthly deficit increased to $418 million from close to zero in the three previous months.
IMF DELAY Some analysts said a gradual weakening of the hryvnia would remain a key tool to constrain imports and prevent a further dangerous rise in the trade deficit. They expect the central bank to let the hryvnia slide further, having kept it in an unofficial range of 21-23 to the dollar for seven months. What's more, the bank has limited resources to intervene to defend the hryvnia, because of a delay in loans from the International Monetary Fund.
Kiev had expected to receive two tranches of $1.7 billion each from the IMF, and several billion dollars from other Western creditors, in the second half of the year. But it failed to meet the Fund's requirements, including to launch tax reforms and approve a tough budget for next year.
The central bank said this week that in these circumstances its foreign currency reserves would not reach the targeted $18 billion by year-end and would stay around the current $13 billion, covering three months of imports. "The hryvnia has come under strong depreciation pressure recently given to limited FX supply," analysts of Raiffeisen Bank Aval said, predicting the hryvnia falling to 28 to the dollar next year.
Among factors piling pressure on the currency they cited the trade balance, excess hryvnia on the market as a result of central bank buying of government bonds, the delay in IMF disbursements, and rising political uncertainty, including over the separatist conflict in eastern Ukraine.
But some analysts based their forecasts on an improvement in this overall climate. "If we receive planned financial assistance from the IMF and other financial organizations, if the trade deficit does not widen, we see the hryvnia relatively stable next year, at 23.5/$1, we do not expect a sharp fall," said Evgeniya Ahtirko of First Ukrainian International bank. Anatoly Baronin of DaVinci said: "Taking into account that the demand for foreign currency from individuals will be restrained by social and economic conditions in the country, it will be on moderately low level.
"Barring possible shocks, risks of war escalation, the regulator will be able to keep the exchange rate within the current indicators, although we cannot avoid some volatility." Annual inflation was running above 50 percent year-on-year until October, when it slowed to 46.6 percent. To curb it, the central bank raised its key interest rate in March to 30 percent from 19.5 percent. Although it cut to 22 percent in September, the rate creates unbearable loan terms for Ukrainian producers and is hobbling economic recovery after two years of recession. Analysts do not expect the central bank to ease policy at its next meeting on December 17. "As the financial situation is getting worse, at this time the reduction of the rate would be a greater risk," Andry Mokriakov of Pro-Consulting said. Only two of the 15 participants think that the rate will be cut to 20 percent by the end of 2015.
"We expect a possible reduction in the central bank's rate not earlier than the second half of 2016. The National Bank is extremely conservative in its decisions," DaVinci's Baronin said. He said the bank would change the rate when it sees strong evidence of inflation falling to the targeted 12 percent. According to the consensus forecast, the central bank will be able to cut to 16 percent in 2016.
Reuters polled analysts at Alfa Bank (Ukraine), CASE (Ukraine), Concorde Capital, Credit Rating, Da Vinci AG, Dragon Capital, International Centre for Policy Studies, Institute for Economic Research and Political Consulting, Raiffeisen Bank Aval, First Ukrainian International Bank, Capital Times, Pro-Consulting, Interbusiness Consulting, InvestCapital Ukraine, Credit Agricole Bank Ukraine.
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