Devaluation is not destroying the economy

2009 promises to be the hard test for hryvnya exchange rate stability.
First, the current level of NBU reserves is not likely to be supported as
domestic banks will face the necessity to refinance their debts at
higher rates. The interest rates are unlikely to be lower than this year
while the demand for retail loans will slow down dramatically. Banking
sector foreign debt, currently standing at $38.5 bln, is likely to
decrease throughout 2009, and this, coupled with trade balance
remaining in red, will not create preconditions for appreciation. FDI
inflows will be among the factors supporting the capital inflows
(another $9 bln are expected to come as FDI in 2009). The outcome
of these trends will be the rate ranging between 5.1-5.2 UAH/$ within
2009.

Though devaluation may be negative in the short-term posing the
threats for capital inflows, its effects will be limited:
• Nominal devaluation in terms of moderating inflation will trigger
real devaluation thus improving the competitiveness of the
leading exporters even in case of worsening global price
environment
• NBU is not expected to afford the massive devaluation by more
than 5% as it may undermine households’ confidence to
hryvnya deposits. In fact, based on previous experience, 1% of
official hryvnya devaluation to US dollar results in 14.9%
increase in withdrawals of hryvnya deposits from the banks
and leads to 13.8% of foreign currency deposits accumulation.
• NBU is likely to start shifting to the multi-basket pegging as in
Russia to mitigate the global currency fluctuations as more
than 40% of its reserves are already in euro.