The threat of hryvnia devaluation is intensifying: by the end of 2023, the exchange rate gradually began to decline. On December 1, the cash rate was around 37 UAH/ $ , by December 31 it reached almost 39 UAH/ $. The official rate, despite its formal independence from the National Bank (since October 3, the official rate is formed based on supply and demand on the interbank market), until the beginning of December it remained around 36 UAH/ $. By the end of the year it reached 38 UAH/ $. That is, in just one month the devaluation amounted to about 4–5 %.
The development of events in the foreign exchange market in 2024 will depend on the situation at the front, on shelling of infrastructure (energy, logistics), on the general macroeconomic trend, as well as on external financing of Ukraine and on the ability of the National Bank to dampen surges in demand for currency at the expense of gold and foreign exchange reserves.
At least in the first couple of months of 2024, nothing catastrophic will happen to the exchange rate. Forecasts indicate that fluctuations will remain within the current limits – 38–39 UAH/$.
“There is reason to believe that in January the NBU’s tactics of “soft” intervention in the interbank market will continue in order to avoid any negative phenomena in the market. The main thing is maintaining a balance between supply and demand,” says Taras Lesovoy, head of the treasury department at Globus Bank.
But a more serious devaluation cannot be ruled out further. And how deep it can be is a question.
What happened to the exchange rate in 2023 and why. The results of 2023 demonstrated the ability of the foreign exchange market to remain stable in the context of a protracted war. During the year, the rate even strengthened by more than 6% from 40.5 UAH/$.
Change in the hryvnia exchange rate to the dollar in 2023
Of course, currency restrictions and abundant interventions by the NBU played a big role in this (in January–December the National Bank sold almost $29 billion on the foreign exchange market). But back in the summer, the regulator began to gradually weaken its manual influence on the exchange rate.. And, as we see, the hryvnia did not collapse.
“For a long time, the relative stability of the national currency was supported by strict administrative regulation, significant injections in the form of grants and loans. This was acceptable given the significant international financial support, internal and external tolerance to the actions of the Ukrainian authorities — even unpopular currency and financial decisions found explanations at the beginning of the war,” comments Viktor Shulik, director of the project management department of the rating agency IBI-Rating.
The foreign exchange market still retains a certain margin of safety, which, due to inertia, can keep the exchange rate within the current framework. Namely:
The macroeconomic situation remains quite favorable: GDP growth in the third quarter (year-on-year) amounted to 9.3%, for the whole year GDP will grow by 4–5%; inflation in November (year-on-year) was 5.1%, for the whole year its level will be less than 6%; business activity is recovering, as evidenced by the results of monthly NBU surveys. The volume of international funding in 2023 covered most of the budget deficit: the amount of funds transferred by partners (both grants and loans) exceeded $40 billion, with $5 billion received in December alone. Gold and foreign exchange reserves are still at their maximum level ($39 billion as of December 1) and allow them to cover five months of critical imports if necessary.. The Cabinet of Ministers and the NBU in 2023 did not resort to emission financing of the state budget, while the domestic borrowing market was activated, but without the participation of the National Bank: the amount of government bonds in circulation from January 1 to December 31 increased by UAH 200 million, to UAH 1.59 billion. The foreign exchange market has shown emotional resistance to various types of challenges and news. For example, there were no serious fluctuations either when the NBU abandoned the fixed official exchange rate, or after the National Bank gave the opportunity to banks and exchangers to sell cash currency to the population without restrictions.
What threatens exchange rate stability? By the end of 2023, devaluation sentiment began to increase. One of the factors behind the weakening of the hryvnia was the NBU’s gradual transition to flexible exchange rate setting.. But this was the expected scenario. But the lack of international financing, which the National Bank began to warn about in the fall, turned from an ephemeral threat a couple of months later into a real threat.
The Cabinet of Ministers does not have a clear plan for where Ukraine will take about $37 billion in 2024 to cover the budget deficit and finance critical needs. Minister of Economy Yulia Sviridenko admitted that without partners’ money in January there could be delays in paying salaries to public sector employees.
If we return to the foreign exchange market, then the lack of external financing will lead to the fact that the NBU will not be able to replenish gold and foreign currency reserves. This means that the National Bank will save reserves and reduce interventions, which, in turn, will lead to a weakening of the hryvnia.
True, so far there has been no reduction in interventions — in December, the NBU sold up to $1 billion weekly on the interbank market. Since at the end of the year the demand for currency increases, the National Bank most likely decided to satisfy this demand. But in January, a regime of austerity of reserves may begin.
Volumes of NBU interventions (currency sales) in November – December, $ million
06.11-10.11.23 389.10 13.11-17.11.23 721.15 20.11-24.11.23 522.10 27.11-01.12.23 739.50 04.12-08.12.23 546.00 11.12-15.12.2 3 863.71 12/18-12/22/23 978.40 12/25-12/29/23 892.67
NBU data
Export stagnation negatively affects the exchange rate. According to the State Customs Service, for the nine months of 2023, revenues from the sale of Ukrainian goods abroad decreased by 18% year-on-year, to $27 billion.. Although imports continue to grow. Accordingly, the influx of foreign exchange earnings into Ukraine, which is the “fuel” for the interbank market, is falling. And if now the NBU compensates for the shortage of currency supply through interventions, then in 2024, as mentioned above, these interventions may be significantly reduced.
Don’t underestimate the impact of panic on the stability of the hryvnia. Relatively speaking, if it becomes clear that partners are not giving money, there is no progress on the front, and the logistics of Ukrainian exports are stalling, this can also contribute to the swing of the exchange rate.
Moreover, lifting the blockade on the border between Ukraine and neighboring countries is a story with two different endings. One of them is an increase in exports, and the second is an increase in imports, which washes currency out of the country. “That is, lifting the blockade could resume the growth of imports and further undermine the trade balance,” explains Yuriy Grinenko, head of the treasury operations department at Credit Dnepr Bank.
What will the hryvnia exchange rate be in the first months of 2024?. Events in the foreign exchange market at the beginning of 2024 can develop according to two scenarios.
The first involves, first of all, the resumption of international financing and the restoration of logistics. At the same time, the NBU continues to gradually move towards a softer monetary policy and is gradually lifting currency restrictions.
This course of events will allow at least until March to keep the official exchange rate in the range of 37–38 UAH/$, and the cash exchange rate in the range of 38–39 UAH/$.
The second scenario takes into account the risks of disruption or delay of international financing, interruptions in exports, increasing tension at the front (due to problems with ammunition, weapons, mobilization), and a decline in business activity.
“Among the devaluation factors, given the reduction in foreign exchange financing from abroad, is the need to collect more taxes into the budget to cover expenses, the need to save gold and foreign currency reserves for possible payments to creditors, and an attempt to equalize the balance of payments,” explains Viktor Shulik.
In this case, the rate may break through the level of 41 UAH/$ already in the first quarter of 2024. Further acceleration of devaluation will depend only on the actions of the Cabinet of Ministers and the NBU.
In fact, the National Bank will have to tighten monetary policy again and increase support for the hryvnia manually at the expense of reserves. As Yuriy Grinenko rightly notes, the rate of exchange rate growth will directly depend not only on the volume of international financial assistance, but also on the NBU’s willingness to part with reserves.
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As a result, we cannot exclude the most radical scenario in which the National Bank nevertheless decides to resume the emission of hryvnia, introduce the forced sale of part of foreign exchange earnings and again limit the sale of foreign currency to the population. But there is hope that it won’t come to that.
“By and large, the strengthening of the hryvnia is not very beneficial either to the NBU, or to the budget, or to creditors. But greatly weakening the hryvnia is also not an option — in addition to negative social consequences, this could lead to a crisis of non-payments and bankruptcies,” sums up Viktor Shulyk.