Ukraine Should Adopt An Export Price Norm' - The Market Monetarist

6/3/2014 Ukraine should adopt an Export Price Norm | The Market Monetarist
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Ukraine should adopt an
Export Price Norm
It has not be a great year for Emerging Markets and the next
Emerging Markets country to worry about could very well be
Ukraine.
This is what my Danske Bank colleague Sanna Kurronen has to say
about Ukraine:
We have been expecting a soft devaluation of the Ukrainian
hryvnia for some time, as the artificially strong exchange
rate is creating severe imbalances in the economy. Currently,
we see it as a likely scenario that Ukraine will allow soft
devaluation in accordance with the IMF, which would lead
to a 10% devaluation of the currency and then move to a
managed float regime following the Russian example.
However, as the necessary devaluation has been
continuously postponed, it is beginning to seem more likely
that the devaluation will be more dramatic.
GDP has been contracting for a year now in Ukraine as
domestic production has been declining significantly. Yet,
retail sales growth was still 6.7% year-on-year in August,
supported by low inflation and rapid wage growth. A large
current account deficit has been putting a pressure on the
hryvnia, which has led to a rapid deterioration in Ukrainian
foreign exchange reserves. The reserves are already at a
critical level, below three months worth of imports. As
market sentiment remains vulnerable for emerging markets,
we believe external debt issuance is now very difficult for
Ukraine and that significant debt redemptions are ahead.
A little more than a third of outstanding loans to both
households and firms in Ukraine are still foreign-currency
denominated. This makes devaluation politically very
difficult. Nevertheless, we believe it is a good time for
Ukraine to close a deal with the IMF, hike domestic gas
tariffs and allow devaluation of the currency. Co-operation
with the IMF would of course reduce the countrys
independence, but only temporarily. The other alternative
would be closer co-operation with Russia, which might have
less predictable consequences. A hike in gas tariffs would
speed up inflation, but the CPI is now around 0%, so there is
room for tariff increases. The presidential election is still
some time away (in March 2015), which allows the economy
to grow while the election draws nearer. By postponing a
necessary devaluation of the currency, Ukraine risks a
severe collapse in its currency, whereas the IMF could
provide the tools for a more restrained devaluation.
This is very much a story of fear-of-floating (due to significant
foreign currency lending) and regime uncertainty (the political
situation is nearly by definition always extremely uncertain).
Ukraines fundamental problem is an extremely dysfunctional
political system and all other problems seems to smaller or large
extent to be a function of the fundamental regime uncertainty in
the country. However, purely looking at the monetary side of things
it is clear that Ukraine should move towards a much more floating
exchange rate or alternatively introduce a variation of what I have
termed an Export-Price-Norm (EPN).
Ukraine could introduce an Export Price Norm by pegging
the hryvnia to a basket of US dollars and the price of the countrys
main export products steel and agricultural products. That I
believe would do a great deal to stabilize aggregate demand growth
in the Ukrainian economy and at the same time introduce a lot more
rule-based monetary policy in Ukraine. Something badly needed in
a country known for extremely low levels of transparency in
economic policy making.
If the hryvina was pegged to a basket of the dollar and the price of
the main export goods then the hryvina would automatically
weaken if the price of for example steel or agricultural products
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drop. That would lead to an significant stabilization of export prices
(measured in hryvina), which on its own would do a great deal to
stabilize overall aggregate demand in the economy. It would not be
perfect, but it certainly be much better than the present quasi-
pegged exchange rate regime and would likely also work better than
a freely floating currency.
If you want to read more on why I think an Export Price Norm
would work well for Emerging Markets commodity exporters see
more here in the case of Angola, Russia, Venezuela, Malaysia
and South Sudan.
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Posted by Lars Christensen on September 22, 2013
http://marketmonetarist.com/2013/09/22/ukraine-should-adopt-
an-export-price-norm/
Related
Kazakhstan's wise
devaluation
Bring on the
"Currency war"
Please dont fight it
the risk of EM policy
mistakes With 6 comments In "ECB"
In "Fear-of-floating"

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