Anatomy of the chronic hryvna devaluation Monetary Policy
Tuesday, 26 July 2016, 11:00
The anatomy of chronic
devaluation:
As long as the issue of investment appeal is not taken seriously and the appearance of new manufacturing facilities remains an exception to the rule, chronic devaluation will continue to plague Ukraine.
1
In the years since the country became independent, Ukraine has become part of the global economy: the penetration of imports in its consumption is one of the highest in the world.
Share of imports in household spending, %, 2005
international comparison
Intermediate imports
(raw materials, equipment), 2005
(raw materials, equipment), 2005
Imports of finished products
and services, 2005
and services, 2005
Source: OECD
2
Although Ukraine has learned to consume quality goods, it hasn’t yet learned to make quality goods: its main forex earnings come from exporting metals and agricultural products.
Sources of Ukraine’s forex earnings, %
Source: NBU
3
More competitive countries earn their forex from selling goods and services, such as high-tech exports, that are largely unaffected by fluctuations on commodities markets. This guarantees the stability of forex income, regardless of resource shocks. Meanwhile, developing countries export fuels and primary raw materials with low added value, making them very vulnerable to periodic declines in resource prices.
Commodity structure of exports in Ukraine and select regions of the world,
% of overall volume, 2015
Source:
www.trademap.org/tradestat/Product_SelCountry_TS.aspx
www.trademap.org/tradestat/Product_SelCountry_TS.aspx
4
An unfavorable business climate is the main reason why Ukrainian businesses are only interested in selling, and not in manufacturing anything.
Ukraine’s competitiveness rank in global ratings
Source:
WB, transparency international, The Heritage foundation, WEF, The center for financial stability
WB, transparency international, The Heritage foundation, WEF, The center for financial stability
5
Even the inflow of foreign investment isn’t helping Ukraine much because most foreign investors have so far been investing in (a) the banking sector, that is, fueling lending to purchase imports; (b) the trade sector, because it’s more convenient to sell than to manufacture in Ukraine; and (c) the privatization of KryvorizhStal. Altogether, these three sources of investment account for more than 50% of all FDI inflows to Ukraine.
FDI in Ukraine’s economy by commercial activity,
%, 2015
1
Agriculture
8
Real eastate
18
Other production
20
Other
12
Steelmaking
(KryvorizhStal)
(KryvorizhStal)
13
Trade
27
Financial
and insurance
services
and insurance
services
52,6%
OF ALL INVESTMENT
Source: State Statistics Service of Ukraine
6
As a consequence, Ukraine’s trade balance only improves after a monetary shock, when the devaluation of the hryvnia “kills” imports. As soon as the economy picks up again, imports immediately start to outpace exports.
Relation between the exchange rate and the balance of trade
Balance of trade, bn USD
UAH exchange rate,
% change (righthand scale)
% change (righthand scale)
Source: NBU
7
Today, the situation has not changed and Ukraine can already see portents of growing pressure on the hryvnia: non-energy imports are sharply on the rise.
Dynamic of non-energy imports, % change, y/y
Balance of Trade, bn USD
Non-energy imports
% change (righthand scale)
% change (righthand scale)
Source: NBU
And so, until Ukraine does something about its investment appeal and the appearance of new production facilities stops being the exception rather than the rule, chronic devaluation will continue to plague the country for a long time to come.
