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bne July 2021 Eastern Europe I 55
is no need to hike again. He wanted
to keep some powder dry in case it is needed later. May’s high inflation was due to rising food prices, the feed- through from a devaluation effect from last year and a low base effect. All these factors are now fading: with the arrival of summer food prices are expected
to start falling; the hryvnia has been appreciating strongly in recent months thanks to booming exports, and the low base effect will also wear off in the coming months. Still, Shevchenko says he is taking a wait-and-see approach.
“In one month we will have more information and data. We still have the low base effect from May 2020 but those effects will fade as the year wears on,” Shevchenko says.
Nevertheless, inflation will remain a problem for the rest of this year and into the next one.
The NBU’s monetary policy is aimed
at reducing underlying inflationary pressures caused by worsening inflation expectations and robust consumer demand, says Shevchenko. As a result, headline inflation is anticipated to be 8% y/y at the end of 2021, returning to the target range of 5% ± 1 pp in the first half of 2022. Thereafter it is forecast to hover at around 5%.
The FX exchange rate has been helped
a lot by the popularity of the local debt market amongst international investors. Inflows into Ukraine’s Ministry of Finance hryvnia-denominated OVDP treasury bills (OVDP) have strengthened the hryvnia and also helped to keep inflation down.
“The FX channel is one of the most important for bring inflation down and
[in the] last weeks we have seen strong inflows into the bond market from non- residential investors,”
Indeed, the appreciation of hryvnia has been so strong that the NBU
has intervened recently to keep the currency in check and bought $700mn to date, of which $500mn was in just the last month.
Plenty in reserve
The positive trade balance has also helped ease another of Ukraine’s big headaches: the low level of foreign exchange reserves.
Ukraine was scraping along the bottom with enough reserves to cover barely three months of imports, regarded by economists as the minimum necessary to ensure the stability of the currency. But as the trade balance has been positive for most of the last year the reserves have increased to $27.8bn in May, or
4.4 months of import cover.
There is still problems ahead, as Ukraine has a heavy debt redemption schedule this year of some $16bn, which peaks with $11bn coming due
in September. But Ukraine has had some luck here too as the International Monetary Fund (IMF) is due to give
the country the equivalent of $2.7bn as part of its SDR transfer programme to boost the post-coronacrisis growth of weaker economies around the world. Shevchenko says that all that money will be sent to the reserves and that the continuation of the currently frozen IMF $5bn stand-by agreement (SBA) is the NBU’s basic assumption.
“We haven’t considered another scenario. There is the $700mn tranche
outstanding, but it's not just about
the money; it’s also about trust,” says Shevchenko. “Co-operation with the IMF brings much more than money. It brings confidence and much cheaper rates on the international capital markets.”
Shevchenko says that one of the major benchmarks to be met to restart the SBA is to pass a new set of banking laws that will bring the sector into line with international norms. The draft bill has already passed two out of its three readings.
“The law passed the first reading in November and it wasn't easy,” says Shevchenko. “Between the first and second reading there were 1,252 new amendments added to the bill. It was a huge battle but we expect the third and final reading to happen by July.”
Oligarchs and staff rows
While the NBU is dealing well with
a regulator’s nuts and bolts issues, there
is a big red question mark floating over the bank: Ukraine’s Oligarch Problem, and the former owner of PrivatBank Ihor Kolomoisky in particular. The
IMF has raised the issue of the NBU’s independence repeatedly in its statements and has said it is a red line issue.
The bank and the staff have come under repeated attack in what former governor Yakov Smolii described as a campaign of terror. Kolomoisky and his partners have brought hundreds of lawsuits against the NBU, and the staff of the national bank have been physically attacked, including ex-governor Valeriya Gontareva, whose house was burnt down in an arson attack.
The question of the bank’s independence was reinforced by the sacking of former
“Co-operation with the IMF brings much more than money. It brings confidence and much cheaper rates on the international capital markets”
Kyrylo Shevchenko
Governor of the National Bank of Ukraine.
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