I will try to explain why the sharp volatility in the Ukrainian exchange market does not allow to devise a long-term strategy of business development, makes a lot of companies bankrupt and causes difficulties with reimbursement of credits.
National business became aware of the mechanism of flexible exchange rate formation in Ukraine in 2015. After steep devaluation and because of the inability of the National bank to retain hryvnia stability its chairwoman Valeriya Gontaryeva made a statement that a transition to free market took place in Ukraine, i.e. flexible exchange rate formation, which is not influenced by a regulator (National Bank).
A free exchange market exists in the majority of developed countries. Moreover, a flexible exchange rate is a sign of a straightforward economic model and equality of all economic agents.
However, if we talk about the experience of other countries, it is worth noting that currency fluctuations, for example, of the euro rarely exceed 0,9-1,2% per month.
For instance, a tendency towards strengthening the euro has become clearly visible over recent months – from 15 January to 14 February the euro-currency strengthened by 0,94 percentage points to 1,2380 USD for the euro.
The monetary policy of the European Central Bank (ECB) is aimed at an increase in the inflation rate in the Eurozone.
According to the president of the ECB Mario Draghi, such policy of the ECB will stimulate a rise in prices and, therefore, it will help European companies to increase production capacity and earnings. Besides, the base rate set by the ECB has been 0% since March 2016. This is a refinancing rate for commercial banks. In other words, the ECB provides free credits for the banks which finance the economy of the European Union.
I will say it again that the ECB policy is aimed at a rise in inflation and economic development, while exchange rate movements of the euro are not sharp.
Another thing is Ukraine
The discount rate of the NBU is 16% per annum. The fluctuation of hryvnia during three weeks of January was 3,5% (to such an extent hryvnia was devalued). In the second part of January, there was a changing trend – as a result, from 15 January to 14 February the hryvnia strengthened by 6,5%, while the NBU introduces a policy of inflation control.
I will remind that in 2015 consumer prices rose by 43,3%, in 2016 – by 12,4% and according to the results of 2017, the inflation rate was 13,7%.
Several factors are a reason for such a rise in prices. For example, a rise in utility payments and gas price but the main factor is devaluation.
Sharp fluctuations of the exchange rate make importers add an exchange risk to the value of goods even if the hryvnia is in a more or less “calm” state. Why are “flexible hryvnia fluctuations” harmful to business?
First of all, the inability to draw up a more or less real strategic plan for 3-5 years. It is just impossible, as, for example, if you include the rate 28,05 uah/usd in a business plan, there are no chances that the rate will be the same.
It is likely that it will be necessary to include the lag within 5-15%. And even this does not resolve an issue with the further implementation of the business plan.
The point is that the economy of the country is closely linked to the foreign currency component. Companies import fuel, materials, equipment and goods held for resale. All this is purchased in a foreign currency.
Thus, exporters have currency returns but they have to take a risk, as the mandatory surrender of foreign exchange proceeds (50%) may occur at the peak of strengthening of the national currency that means some losses for them.
Importers face even more difficulties – they do not have currency returns but they have a constant need to buy currency in the interbank exchange market.
At what exchange rate will importers buy currency tomorrow, in a week, in April or June? The company cannot foresee this, therefore it regularly takes the risk of sustaining losses while buying currency at the peak of devaluation.
The profit level of business suffers as well and, of course, there is such important factor as credit exposure.
No matter how much the company risks or how much it loses from exchange rate fluctuations, debts should be repaid to the banks. The vehicles purchased, using the currency leasing program, and the equipment purchased for the oil-extracting factory, using the currency credit program, make the situation in the company more complicated if increasing currency volatility occurs, as to pay off loans becomes harder.
In my opinion, flexible exchange rate formation should exist, however, in a bit different form than it is presented to us.
Business requires transparency and understanding of rules of the game. The exchange market which satisfies a demand for currency but at the same time does not pose a threat with exchange rate fluctuations of 1-3% during a week or of 3-8% during a month is necessary for business development.
However, there is no guarantee that mentioned fluctuation is really linked with the market performance but not with pure speculation.
The predicting behavior of hryvnia determines the success of the company in many ways. Ultimately, it determines opportunities for economic growth of Ukraine and GDP growth.
Sharp volatility makes companies regularly revise their business plans, terminate certain investment projects and reduce the range of activities. All this does not promote the economic development, which the country apparently aims for.
Andrey Zhariy, the CEO of Aurum Group