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J.A. Schumpeter

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Обращаем внимание на инновацию, созданную на данном сайте. Внизу главной страницы расположены графики,  которые в on line демонстрируют изменения цен на мировых рынках золота  и нефти, а также экономический календарь публикации в Интернете важных мировых экономических индексов 

Warning: Forecasts IEE

Club of Analysts’ Forecast #3 2008. Exchange rate of Hrivnya will stabilize at a new equilibrium level.

 Forecasting of a depreciation of the artificially revaluated exchange rate of Hrivnya and behavior of some market players was not a challenge. Moreover, the forecast of growing risks in the Ukrainian banking system was also an easy task.

             During the last two years we have been forecasting exactly this scenario – depreciation of the Hrivnya and active speculative activity.

             Growing deficit of current account made support to our forecasts. This means that the fundamental macroeconomic equilibrium has being violated beginning from April 2005 with further aggravation in 2008.

            The idea is that under any situation the economy will restore the equilibrium due to internal self-organization. Violation of the fundamental equilibrium can give some results in the short-run, but will cause severe damage in the medium- and long-run due to crisis processes of self-restoration of economy.

            The explanation of the processes for economy of Ukraine is as follows. The exchange rate of the national currency and current account balance are functionally interconnected. The results of the wrong strategy were artificially strong Hrivnya and growing current account balance. As a result, business activity of exporters and domestic producers has been partially suppressed due to growing supply from the side of importers.

            It’s not a secret for experts that revaluation of the national exchange rate causes a decrease of net exports (difference between exports and imports).

            The first attempt to stop restoring the economy of Ukraine from the side of the National Bank was made in 90-es, when keeping the rate on the level of UAH/USD 1.87 created a negative current account balance followed by a drastic devaluation of the Hrivnya to UAH/USD 5.50 and restoration of a positive current account balance. Then, in 1998, the situation was aggravated by blowing of the government bonds bubble and crisis in Russia (Russia declared default which became a “life vest” for Ukraine to explain the depreciation of the Hrivnya). Due to this reason the crisis in Ukraine, caused by artificially strong Hrivnya, was not obvious, having being hidden among other problems. Worth noting, in the end of 90-es Ukraine had positive balance of current account due to devaluation of the Hrivnya, and this positive balance remained positive until 2005.

             The second attempt to stop restoring the economy of Ukraine was on the pretext of fighting with inflation in 2005, when the National Bank again revaluated the Hrivnya.

            There were a lot of excuses: inflation was growing – producer price index was growing stimulating a growth of consumer prices. But all this was a consequence. The National Bank tried to regulate consequences, except of looking for a problems causing inflation and resolve them. As a result, revaluation of the Hrivnya has been chosen as an urgent measure to combat inflation.

            It was obvious already in 2005 that there will not be a “soft landing” of the economy. Nobody, even the NBU, could stop these destructive processes. The structure of crediting and inflow of resources to the economy have been changed. Overvalued Hrivnya stimulated imports suppressing domestic production. Quick devaluation of the Hrivnya to restore positive balance of current account was impossible. Treating the temperature (inflation) the disease has remained.

            Thus, the NBU wanted to do as better, but did as always.

 The result of treating the inflation with revaluation of the Hrivnya in 2005 became the following problems in 2008:

-        even higher inflation;

-        deficit of current account;

-        foreign debt of 60% of GDP;

-        crisis of the banking system.

The side effects were obvious, but the hope for soft landing still remained.

Third attempt.

             But alas, the National Bank with stubbornness worth criticizing revaluated the Hrivnya the third time and make some steps to limit crediting. Economy, as a train, stopped suddenly facing these obstacles. After inflation of 30-40% we could see deflationary tendencies. The growth of industrial production decelerated. Under these conditions the banking system faced problems of returning multibillion debts.

 Bad end.

 Now, economy can restore only through an adaptation to the crisis extended in the time. Market processes on the FOREX market caused depreciation of the Hrivnya against the US Dollar.

            As we had forecasted, depreciation of the Hrivnya, as an inevitable reaction of the economic system on artificially distorted equilibrium, was only the question of time. The Hrivnya had to depreciate either due to inflation, or as a result of nominal depreciation of the exchange rate.

             We can accuse some politicians playing a “dirty game”, world financial crisis, deficit of the US Dollars in the EU, but without fundamental disproportions nobody could speculate for a long time.

Conclusions and propositions.

 Such a problem with the monetary policy appeared only because the National Bank was been transforming into a closed for analysts and scientists system. This breaks its ties as a system guaranteeing effective correction of policy, which is necessary for development of the money market. As well known, entropy is increasing in all closed systems, and they are exposed to the threat of crisis processes, without any exclusion as the experience has shown.

             The National Bank, as we reckon, has to follow the policy of Alan Greenspan with the main accents on:

-        forming of rational expectations;

-        policy of active informing of market players; supporting of informational and educational centers of the country;

-        forming of societies of analysts, taking part in their activities (for example, Alan Greenspan was a head of New York Society of Analysts);

-        stimulating scientific activity in the area of monetary, currency and financial problems of development markets and institutions.

 The problems have appeared also because of interventions of politicians into activity of the National Bank. Political bargaining on the position of Head of the National Bank is not a mistake – it’s intervention into activity of the main centers of management by system processes. For example, in the United States President of the country is criticized for mistakes of Head of FRS. Changing of Head of FRS is the result of his retirement or change of policy. This experience has to be followed by Ukraine.

             The exchange rate will stabilize at a new equilibrium level. The rush will end, but the NBU has to get rid of the deficit of current account. The economy will face the trough of the cycle in the beginning of 2009. The phase of expansion will begin in the end of summer depending on the performance of the banking system with 7-billion repayments of loans, industries with artificially created shock. Apart from these factors, expansion depends also on appearing of innovation technologies – the main drivers of economic development.       





Posted on the website: 2008-11-22

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