IEE Forecast: Growth of a dollar exchange rate can cause growth of the external economic risks for Ukraine

This week (February, 14 - 20, 2005) experts of the world expected two large events. Their results will necessarily affect short-term dynamics of a dollar exchange rate. On the development of current events: - First, on February 15 (Tuesday) the USA exchequer will publish the December accounts of the capital movement  (TIC - a stream of the international capital), data about foreign investments into the American securities, and about the American investments into foreign securities. It is a question of the account clauses of the capital movement influencing the balance of payments in the USA. Movement of the capital and current operations together also make a basis of the balance of payments. They should be equal to each other. If they are not equal, the value of streams of the goods and services should be equal to the short-term value of counter monetary streams. They are leveled either with operations in the currency markets by the central bank, or are corrected by the market due to change of the price of money - a rate of exchange. Considering huge deficit of the account of current operations in the USA, there should be a corresponding sum of the account of the capital movement, sufficient to block this deficit. Therefore there are no doubts in serious expectations of the TIC market of data. This day is one of boundaries on which participants of the market verify all the data, sum up, etc. In the ideal, the difference between foreign investments and the American investments should block the sum of deficiency of the current account. If operators of the market will not consider it, the market through a dollar exchange rate will immediately modify a difference, and so lead to their balance. That the currency market has accepted information TIC without correcting a rate, the December parameter of the capital inflow together with the balance should be overlapping trading deficiency of the USA for the same period. According to the previous (January) data of exchequer for November, 2004 inflow of the capital to America has made $81,0 billion ($99,7 billion the American securities bought by foreigners, and minus $18,7 billion the foreign securities bought by Americans). Data on TIC always go with greater delay because of huge quantity of calculations, which should include data of many departments; therefore we learn December data only today.- Second, on February 16 and 17 (Wednesday and Thursday), Alan Greenspen's semi-annual report in the Congress on a condition and prospects of the American economy and on FRS policy. Every time when Greenspen speaks, during dinners, or with lectures, the financial world waits standstill. Any intonations of its speech can cause financial echo worldwide. Especially we mean his speeches in the Congress. It is difficult to expect any changes from the way of speech, in comparison with last speech at G-7 meeting, but it is necessary to pay attention to intonation, and to answers to questions of congressmen. In the beginning Greenspen will present his report to the Senate, then - to the House of Representatives. As the overwhelming majority of analysts believe, most likely the Head of FRS will repeat words about the policy of increase for a discount rate in the "weighed" mode which allows to adhere rather low inflation, etc. Analysts expect to receive the information about deficiency of the balance of payments from intonations of speech. If it will be "sharp", the dollar will decrease this very day. Nevertheless there is high probability that it will not differ from a recent speech in London. In favor of this forecast speaks that fact that the government and FRS have precisely verified strategy. Owing to it, as it was stated earlier in IEE forecasts, they strongly keep the initiative, and are the leaders of the market and the governments of other countries. However nobody would risk speaking so today. Therefore nothing remains but to wait speeches of FRS Head.What possible consequences can this cause for Ukrainian economy? The year 2004 was very favorable for Ukraine while the dollar fell to euro and was stable to grivna. As a result, income of people in dollars has been kept; also markets worked easy. But the grivna fell to euro together with dollar. In 2004 it has brought to Ukraine a gain for foreign trade for 3 629,6 million dollars more in comparison with the year 2003. According to Goskomstat data, export of goods in 2004 has made $ 32 672,3 million (reference: in 2004 gross national product of Ukraine has made $ 62,3). It has increased for 41,6 % in comparison with the year 2003. Import of goods has made $ 28 996 million, having increased on 26 %. Now we came closely to the moment when the situation can change. For now the situation is dual.The first scenery for the events development. If the dollar will increase to euro at the constant course policy, incomes of the population will not suffer, however incomes of exporters will suffer. At the export making half of gross national product it means activization of much greater risks for the whole country. If to become dependant of the euro in this situation, the specified risks can be avoided, but thus risks of decrease in incomes of people in dollars will grow. It looks like there come times for Ukrainian economy when it can suffer from fluctuations of the currency market. There is one more scenery for the events development. The dollar, despite of the started policy for its strengthening, nevertheless will fall under weight of deficit of the current account in the USA. In this case nothing will change for Ukraine, at least concerning risks of the dollar factor.So looking at events of forthcoming week, all Ukraine has to do, is to pray only that the dollar continued to fall. However the logic speaks the return: however the week events have ended, its falling cannot proceed infinitely, and it means, that very soon the situation from the dual can pass into unequivocal. Therefore there should be taken measures for neutralization of possible risks today. Certainly, Ukrainian entrance into WTO will serve a political tool of decreasing for the mentioned risks. However, it is considered, more effective measures would take place in case of the state innovative policy realization. So it will allow any country to become mightier and independent from any factors. As to the internal factors, which compensate specified risks, it is necessary to carry significant potential of economic growth to them due to activization of internal consumption. It is a question of activization of the factors removing restrictions on ways of incomes growth of people, of fine and average business. First of all it concerns reduction of huge unproductive transaction costs, which are a burden for economy, that even rich countries cannot allow. Second, this means putting all spheres of tax system in order.Third, reforming of a monetary and credit policy. Fourth, activization of policy of economical structural reforming. Fifth, activization of the humanitarian factor of economic relations.These five factors are so important also because without them the innovative policy will be complicated.

I.Makarenko

IEE

Posted on the website: 2005-02-15