Banks Standing Firm, Sufficient Reserves of Hard Currency

Although the latest political turmoil adversely affected the financial market, the hryvnia’s exchange rate remains stable, thanks mainly to a political decision made by the National Bank of Ukraine and commercial banks to join forces for the sake of stability. In all probability, certain political forces would have found it expedient to cash in on the tense situation in the currency market, but it was mostly the bankers’ wisdom and their determination not to take advantage of the disturbance that saved the day. The overwhelming majority of banks are staying out of the dirty schemes that sustain the activated black currency market in some regions. Tellingly, in the days when it was possible to speculate on the dollar rate, the financial market’s chief players unanimously refused to upset the balance that the National Bank had established by keeping the hryvnia rate intact in the past three years in order not to undermine the increase in exports. At the same time, importers were also pleased with predicted stability of the exchange rate.

Now the financial market is showing signs of returning to normal, although there are some disturbing factors, including quite a brisk demand for dollars. However, bankers are forecasting that the situation on the currency market is most likely to finally stabilize after the elections. Bankers are already noting that the demand for hard currency has begun to subside and that demand and supply are leveling off. For instance, the National Bank says that last week the population bought $193.8 million more than it sold, whereas the week before the difference was $283.6 million.

What is also having a beneficial effect on the situation is the pre- Christmas season: in anticipation of the holidays, people are beginning to sell dollars to buy presents with hryvnias. Bankers are sure that they will be able to maintain the national currency’s rate. Since the situation was exacerbated by the political conflict, the cash currency market will regain stability once this crisis is over. The hryvnia is the CIS’s most stable currency, so the banking system is obviously not prepared to let this achievement go. What’s next? Below some influential Ukrainian financial market traders offer their opinions.

Arseny YATSENIUK, acting chairman of the National Bank of Ukraine (at press time):

“Many people are now wondering if the NBU intends to revaluate the hryvnia. My answer is: the National Bank Board has left intact the basic outlooks for currency exchange rates in 2004 and 2005. The National Bank will continue to pursue a policy of stable exchange rate, and the official dollar-to-hryvnia rate will remain at UAH 5.31 for $1. We forecast a rate of UAH 5.27-5.31 per dollar in 2005. In other words, there can only be inessential revaluation.

“There are a lot of questions about whether increased interest rates on fixed deposits will last for a long time. I can say this is temporary. Nobody will be drawing this kind of interest in a month or so. As for me personally, I keep most of my basic savings in a hryvnia account, a certain amount in a hard-currency one, and some cash at home as a contingency measure.”

Borys TYMONKIN, chairman of the board of directors, Ukrsotsbank:

“The Ukrainian parliament passed its latest ‘package’ decisions by a majority vote that far exceeds the constitutional requirements. This went a long way to reduce peoples’ anxieties in society and had an immediate effect on the preferences of depositors. As early as the next day our bank saw an inflow of money from the population. The outflow of individuals’ money from Ukrsotsbank can be characterized as inessential. On the whole, just like the entire banking system, we are looking forward to the final resolution of the banking crisis.

“To reverse the situation, we have revised our deposit programs. Under the circumstances, we were forced to increase interest rates. In particular, we set 19.5% per annum for the hryvnia and 12.5% for foreign currencies. We had to raise the rates only because of the extraordinary situation. The inherent higher-than-usual risks were caused by political, not economic, uncertainty. So as soon as political passions calm down, deposit rates will begin to drop. This value of banking resources by no means corresponds to the situation in the economy that, incidentally, is in dire need of cheaper credits. But how can they be cheap if deposit rates have skyrocketed?

“In spite of this, we remain optimistic and are forecasting quite a rapid overall business recovery, for payments are already on the rise. For example, on Monday, December 6, we effected 160,000 payments outside the bank. We’ve also reached a new level of inter-banking settlements — UAH 16 million of the surplus money inflow. We have already lifted restrictions on with drawing money from our cash machines. A few remaining restrictions comply with the NBU’s latest directives.

“Incidentally, I think the NBU was quite right to take some well- balanced, timely, and indispensable measures in the current situation.

“Naturally, our clients are concerned about the hryvnia’s rate. I am sure the rate will remain stable, not only because the NBU will tap its reserves. For the demand in question has in fact been met. Our own monitoring of the currency exchange market showed a reduced rate. Today, our bank customers can buy as much as $1,000 in cash. We are fully capable of returning this process to the former, pre-crisis, level.”

Oleksandr DERKACH, chairman, board of governors, Aval Bank”

“The situation in the cash currency market is going to stabilize in a week or so. In the past few days the dollar-hryvnia rate has considerably dropped in the ‘unorganized’ cash market (as of December 13) to UAH 5.47-5.55 for $1 (depending on the region), whereas the week before it reached UAH 6-7 per dollar in some regions.

“Besides, while the banks experienced certain problems with the cash dollar supply last week due to brisk demand and some reduction of limits, now the situation has fully stabilized.

“Today, Aval Bank holds about $50 million in cash, twice the normal amount. So now there is nothing that to prevent a timely pay-out of cash, including remittances that have reached maturity and deposits. The still valid restrictions on conversional cash operations will be lifted in the nearest future.”