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Yu.P. Makarenko FOREIGN EXCHANGE MARKET LIBERALIZATION AND MINIMIZE ITS RISKS Summary. The scientific methodological study of the problem of stabilization of the currency market and the gradual implementation of the liberalization process in order to empower national institutions and organizations in the implementation of external borrowing is carried in the article. Key words: the foreign exchange market, liberalization, exchange rate, currency regulation, exchange policy. Thes tatement of the problem. The modern economy of Ukraine is largely dependent on external conditions: this energy, fluctuations in export markets, capital flows and so on. Increasing presence of non-residents quickly accumulated external debt, causing, in turn, increase currency risk. Continues currency liberalization, which can stimulate economic growth while significantly increases the vulnerability of the global financial crisis. In this connection special importance is the problem of stable foreign exchange market and the development of effective monetary policy, since the exchange rate is one of the environmental factors which significantly affects not only the indicators of foreign economic activity (competitiveness of domestic producers, the volume of import-export operations, etc.) but also on the functioning of the banking sector. The analysis of recent research and publications. Among the scientific papers on the issue of liberalization of the foreign exchange market, it is necessary to distinguish research scientists such as J. Belinska, A. Dzyublyuk, S. Goals, S. Kulinets, V. Mishchenko, A. Nidzelska, K. Shulha and others. However, to be agreed approaches to stabilize the foreign exchange market of Ukraine in order to continue the process of liberalization of the currency, reducing the NBU intervention and government. The purpose of this article is to summarize theoretical approaches scholars disclosure of what constitutes a "currency liberalization" and the study of measures for its gradual implementation. The main material. In the financial crisis, monetary policy can both mitigate and enhance the transfer of the effect of external shocks on the economy of Ukraine. Appropriate adjustment of monetary policy is dictated not only the current level of currency risk, but also take into account the general state of the economy (the dynamics of imports and exports, the amount of foreign investment, inflation, the size of reserves, etc.). Thus, in the current economic conditions the domestic banking supervision was not effective and operational (eg, delayed introduction of the interim administration). Imperfect methods of supervision and low speed applications only deepened the problems of the banking sector of Ukraine. Note that the foreign exchange market of Ukraine can be divided into six stages (the first five steps listed in Table. 1). Table 1 Stages of development of the foreign exchange market of Ukraine* Fifth (2005 September 2008) Fourth (19992004 years) Third (19971998 years) The second (1994-1996 years.) First (1991-1993 years) Stage Major events January 1, 1992 was introduced coupons reusable in November - UAH. In September 1992 work began Currency Exchange National Bank, which were founded more than 40 commercial banks, and in July 1993 it was reorganized into the Ukrainian Interbank Currency Exchange. The limit margin between the buying and selling rate of foreign currencies: on cashless transactions not more than 2.5% from the official exchange rate on cash transactions - not more than 2.5% of twice the official exchange rate. In 1992 work began on the creation of official international reserves (USD - 40%, the German mark - 20%, ECU - 20%, other currencies - 15% gold - 5%). On March 11, 1994 was launched auctions of dollar as of April - the German mark and the Russian ruble. In 1995 was finally formed the interbank market, where contracts were concluded directly between banks authorized to conduct foreign exchange transactions. In 1995 it was abolished mandatory redemption of 10% of foreign exchange earnings entities to official international reserves. Since September 1998 was introduced mandatory sale of 75% of foreign exchange earnings in favor of a resident in the same month requirement is reduced to 50%. From December 1998 was introduced temporary restrictions on lending by banking institutions in foreign currency, non-cash purchases and sales of hard currency held only in Ukrainian and Crimean interbank currency exchange was introduced mandatory documentary evidence is hardly goods receipt and receive services when considering applications for purchase of foreign currency. In December 1999 work was initiated Trading Session and the system of confirmation of transactions in the interbank market, according to which the daily foreign exchange transactions conducted in real time. From the second half of 1999 the regime NBU exchange rate band moved to a floating exchange rate and since February 2000 a monetary policy official recognition. On July 1, 1999 was canceled the previous limit (advance) payment for import contracts. From January 2000 banks were allowed to foreign currency lending to individuals. In March 2005 it was abolished mandatory sale of 50% of foreign exchange earnings for the benefit of residents. In November 2007 the composition of banks' liabilities, subject to the mandatory reserves include funds raised by banks from foreign banks and financial institutions for non-resident. In order to reduce the currency risk The NBU requirements covering his capital (in accordance with the requirements of capital adequacy) through the limitation of open currency positions. Note: *compiled by the authors according to [2; 6; 7; 11] As can be seen from the table. 1, the first phase (1991-1993 years) characterized by the absence of national legislation on currency regulation and currency control, the imperfection of the economic and tax policy, which was held in foreign economic activity, low level of organization of the banking system in this area, the presence of small (currency reserves of the National Bank of Ukraine and real threat of complete exhaustion in terms of depreciation pressure on the currency, the active use of foreign currencies in the domestic money circulation [11]. The second phase (1994-1996 years) the foreign exchange market was characterized by the introduction of the obligatory reserve funds of which are on the foreign exchange deposit accounts. Phasing out of the crisis contributed to the establishment of equal access commercial bank to bank auctions NBU also accompanied by a decrease in the discount rate and the removal of restrictions on the amount of loans issued by commercial banks. However, the auction bidding form was ineffective because it does not meet the circumstances of currency regulation. To facilitate the foreign exchange market and foreign economic relations of October 1994 was restored trades in foreign currency at the Ukrainian Interbank Currency Exchange [6]. In the third phase (1997-1998 years) was suspending economic downturn and further liberalization of the foreign exchange market. During this period, the foreign exchange market of Ukraine has been under significant pressure due to the involvement of the Government of Ukraine of short-term capital needs of foreign investors to finance its budget deficit by implementing bills directly through the interbank market and the Ukrainian Interbank Currency Exchange. Pressure funds for non-residents were uneven (January-August 1997 there was a significant inflow of foreign exchange, and in September 1997 - the outflow of foreign capital in the financial crisis in Asia). Using the exchange rate band as one of the controls market made it possible to establish clear guidelines for economic operators and strict upper limit was an important ant inflation factor which helped prevent inflation expectations and effectively restrain the pace of internal devaluation of hryvnia [2, p. 24]. The foreign exchange market in the fourth stage (1999-2004 years) occurred in the conditions out of the economic crisis and the subsequent economic growth caused by the increase of output, lower inflation, budget deficit, increase exports, which ensured the formation of a positive current account balance. These economic changes have made it possible to reduce the value of the discount rate of the National Bank, which has a positive impact on the cost of credit for businesses and households, helping to increase the availability of loan resources for business market. This allowed us to gradually move away from strict administrative regulation and take a course on liberalization of the foreign exchange market. NBU on the basis of data on transactions of sale of the currency received from commercial banks independently determined the official exchange rate to other currencies. The fifth phase (2005 - September 2008) is the slowdown in economic development, which was manifested in the reduction of GDP growth, a significant increase in the budget deficit, current account deficit and inflation. Also in this period comes a significant amount of speculative capital, the negative impact is amplified because of rising external corporate borrowing rates and foreign investment in privatization. Since 2005 to liberalize the foreign exchange policy of the National Bank of Ukraine inherent increase the period during which the resident must enroll in foreign exchange earnings in foreign currency accounts, reducing demands special list of documents required to obtain a banking license and documents for obtaining written permission, increasing the rate of import and export of cash and precious metals across the customs border of Ukraine (although requirements for regulatory capital formation which is essential for the authorization of transactions with currency values markedly increased) [2, p. 27]. The liberalization of monetary policy accompanied by the establishment of stricter requirements of foreign exchange regulation and increased accountability for violations of currency legislation. In particular, one of the main instruments for regulating currency risk for banks was to establish standards of open currency positions. Currency position of the authorized bank determined daily for each foreign currency and each precious metal. By November 2005 the value of these ratios (S 13, S 13-1, 3-2 S) respectively accounted for no more than 35, 30 and 5%. To modify the ratio of S 13 is set at no more than 30%, S 13-1 - 20%; S 13-2 - 10% [7]. Sixth (current phase) starts from September 2008, when the situation on the currency market has changed dramatically affected reduced inflow of foreign currency into the country through the global financial crisis. Exacerbated the situation was also of decreased revenue from exports due to falling world prices for traditional export commodities. As a result of these changes, accompanied by the rapid growth in demand for foreign currency, devaluation expectations in the society and general uncertainty, there was depreciation in the interbank market. The lack of economic prerequisites for strengthening exchange rate led to a rapid devaluation of the hryvnia: September devaluation of the official exchange rate was 0.32% in October - 18.5% in November 17.04%, December - 14.21% [2, p. 29]. A significant depreciation of the hryvnia was due to a number of structural and trade imbalances related primarily to: - Lack of competitiveness of domestic producers both foreign and domestic markets; - Insufficiently effective use of external borrowings by active stimulation of consumer demand directed for investment purposes for final principle; - Excessive power consumption and lack of domestic production of targeted government policies to reduce it; - Budgetary imbalances that provocation super social obligations of the state and slow investment in fixed production assets; - Formation of persistent trade deficits and simultaneous acceleration of inflation and so on. A special role is played steady investment indifference large domestic business, which failed to use technological renovation of production and reduce its cost or favorable prices observed in international markets in recent years, nor the benefits of targeted experiments in the export sectors of the national economy. A significant devaluation of the hryvnia is not in reduction of imports and increasing exports, in fact, it had no effect on improving the competitiveness of domestic exporters. By the end of 2008, the NBU has primarily of the sale of foreign currency to stabilize the exchange rate. During this period deficit NBU interventions exceeded 10.4 billion dollars United States [5]. Besides Ukraine, during this period a significant devaluation of national currencies held in over 20 countries. In particular, in early 2009 devaluation of the pound to the dollar was 45.3%, the Russian ruble - 33.1%, the Polish zloty - 35.8% of the Icelandic crone - 268% Turkish Lira - 41% [4]. With the rapid growth in demand for foreign currency NBU introduced administrative measures to reduce speculative pressure on the hryvnia and the limitation of its depreciation trend. Setting strict limits on the dollar selling rate of the population in the cash market and increased requirements for applications authorized banks to buy foreign currency, which was accompanied by the introduction of restrictions on the operations of banks with this currency, provided the decline in speculative transactions authorized banks in the foreign exchange market. After setting strict limits on cash foreign exchange banks began to charge a commission for purchases and sale of foreign currency, which was also stopped regulator. In order to minimize the outflow of foreign currency from the country's National Bank has introduced restrictions on the purchase and exchange of foreign currency required to make payments to non-residents for imports of goods (works, services, intellectual property rights), which should occur only if the actual receipt of the goods into the territory of Ukraine [10]. To limit the direction received funds to refinance banking institutions to conduct speculative trading in the foreign exchange market, which had a negative impact on the exchange rate, the NBU tightened requirements for refinancing. In particular, it introduced of liquidity support, based on a detailed analysis of the application of each individual bank in the light of current liquidity, reducing deposits, banking activity and participation in the interbank credit market. Along with the application banking institutions had to submit detailed information on the causes of loss of liquidity [12]. In order to strengthen the control over foreign exchange transactions of banks a requirement for the submission of information on authorized banks distribution actually bought the NBU foreign currency in order to fulfill customer orders and statements and operations of the bank, including within the limits of open currency position. To ensure stability in the foreign exchange market was repealed the requirement to calculate ratios of total open currency positions and introduced changes to the limits on open currency position [8]. To reduce the risk of banks for credit transactions in foreign currencies had strengthened the requirements for forming a reserve order for those borrowers who do not have stable sources of foreign exchange earnings. In addition, the requirement introduced mandatory monitoring of foreign currency loans for their intended use under the terms of the loan agreement [9]. Realizing the shortcomings of derivatives, especially in the exacerbation of global financial crisis, increased volatility in the capital markets, the National Bank of Ukraine amendments to the Regulation "On the Procedure and Conditions forex trading" banned subjects interbank currency market of Ukraine transactions in foreign currency derivatives financial instruments whose underlying asset is a currency values, exchange rates, interest rates and indices. In order to prevent residents purchase foreign currency to meet obligations for non-residents (of debt, guarantee, surety) and to reduce the volume of transactions in foreign currency in Ukraine for liabilities between residents (bank guarantor and the debtor) NBU banned and purchase of foreign currencies: - A resident in order to fulfill obligations under the non-resident debtor in case of debt under the loan agreement (loan agreement); - Resident guarantor (surety) that is not subject to market; - Resident debtor to reimburse foreign exchange guarantee (guarantor) authorized bank; - To accommodate resident allowance (covering) for the obligations secured by a guarantee, surety agreement. Another one of the issues of currency risk is the problem of excessive inflow or outflow of international capital, under certain conditions, determines the devaluation or revaluation pressure on the economy. Some economists in the event of excessive capital inflows offer national regulators to apply such measures [3, p. 37]: - Lock on interest bearing account at the central bank of all new foreign liabilities of commercial banks; - Prohibit the sale of securities by non-residents; - A ban on interest payments and the introduction of negative interest rates on time deposits of non-residents. If the outflow of international capital national regulators need: - To limit the export of local and foreign currency, gold, securities, etc; - Tighten control over the capital market; - The participation of national banks in the provision of international credits. In 2008 to prevent artificial withdrawal of capital from Ukraine under the guise of return on investment (according to the State Committee for Financial Monitoring of Ukraine the volume of transactions in 2007-2008 Reached almost 17 billion UAH.) National Bank of Ukraine has limited the amount of foreign currency purchases of to return portfolio investments (income from them) the amount that may not exceed the market value of securities in accordance with the evaluation report their market value, composed of evaluation of, or official notification of listed securities [10]. On November 4, 2008 to strengthen banking supervision on client transactions to return from Ukraine foreign investments (income from them) was established mandatory five days of placing funds intended for the purchase of foreign currency on a separate analytical account of the balance of the bank account. To further minimize the demand for foreign currency 18.12.2008 was limited to the right banks to arbitrage transactions of buying and selling foreign currency. These measures have led to the fact that in early 2009 the foreign exchange market experienced a gradual reduction of the deficit of foreign currency. Thus, the interbank segment of its daily supply increased by 10.6%, while the average daily volume of foreign exchange demand fell by 4.5%. This helped reduce the deficit of foreign currency, allowing the NBU reduced by 01.01.2009. Amount of their negative interventions - under 2.8 billion dollars and 874 million dollars USA. This official exchange rate to the dollar during the December 2008 changed from 6.7418 to 7.70 UAH/USD USA, and in January 2009 - has not changed [5]. In the same period rate against the dollar on the interbank market rose by 0.92% up to 7.9183 UAH. / USD. USA. Accordingly, strengthened and official exchange rate: relative to the dollar - by 0.75%, and against the euro - on 6,68%, while the hryvnia against the Russian ruble depreciated by 2.22% [5]. In the first quarter of 2010, the excess supply of foreign currency on its demand in the interbank market totaled 1.015 billion Dollars USA. This allowed the NBU will not only minimize its negative foreign exchange intervention, but also restore its purchase. In March 2010 monthly balance of currency interventions NBU turned positive – 953 700 000 Dollars United States, compared to "negative" 561.1 million Dollars United States in February 2010 and "minus" 1.0796 billion Dollars United States in January of that year. Despite this, the overall balance of interventions NBU in the first quarter of 2010 remained negative - "minus" 687 million Dollars U.S., inter alia affect direct support payments "Naftogaz Ukraine" for its external contracts [5]. Given the general improvement in the foreign exchange market and minimizing deviations from the official exchange rate of hryvnia its quoted market prices to the dollar while decreasing spread between the buying and selling of foreign currency, the National Bank has suspended auctions targeted to meet the needs of individuals to repay their debt by currency loans. In first quarter 2010 was conducted ten such auctions, which sold 65.6 million Dollars United States, 0.2 million Euros and 2.4 million CHF. Despite the positive foreign exchange intervention NBU in March 2010, which contributed to an increase in international reserves this month by 4.1% as a whole for the first quarter of 2010 they decreased by 5.1% - up to 25.1475 billion Dollars USA. The cash segment of the foreign exchange market in the reporting year there was a marked increase of average annual volume of transactions (21%) against anticipatory increase of foreign currency: the volume and buying banks increased by 22.6% and sales - 20.1%. Overall, in 2010 the demand for foreign currency exceeded its supply by 9.7 billion Dollars (In equivalent) compared to 8.4 billion Dollars United States in 2009 Despite the above, the weighted average exchange rate of hryvnia on sales by banks cash dollars in 2010 rose by 0.66% and stood at the end of the year 799.47 USD $ 100 United States [5]. August 8, 2011 the Verkhovna Rada of Ukraine in order to reduce the risks of the financial system complemented by Article 11 of the Law "On Protection of Consumer Rights" rule, which prohibited the provision of (receiving) consumer loans in foreign currency in Ukraine. Therefore, to further stabilize the foreign exchange market and reducing currency risk offer: - Improving procedures of the foreign exchange market and the principles of hedging; - To strengthen the work of monitoring foreign exchange risks; - Improve prudential procedures to prevent the exchange risks associated with conducting operations on capital in foreign currency; - Introduce compulsory for obtaining permits from the national regulator to attract foreign loans; - Deposit a portion of foreign loans obtained by the borrower in special accounts in the National Bank; - Optimize the mechanism of the relationship between the demand for local and foreign currencies, which should provide direction hryvnia flows primarily in the real economy; - Restrict the commercial domestic banks to international credits in foreign currency; - Limit the payment of interest on deposits of non-residents in domestic currency. The practice of modern international relations suggests that a large amount of currency risk was observed in those countries that kept the "mixed" exchange rate regime without proper orientation for a fixed or floating mode. According to economists, in terms of globalization increasingly prevalent polar forms of implementation of monetary policy in the form of free floating or rigid fixation [1, p. 33]. The main advantages of fixed exchange rates are: increased investment; convenience when planning international trade and financial transactions; high efficiency in the case of lack of market instruments. On the other hand, the inflow of foreign capital may lead to excessive credit expansion of banks, which, in turn, will contribute additional inflationary pressure on the economy. In addition, maintaining the exchange rate at a given level requires a significant amount of international reserves national regulator. In our view, after the restoration of a stable foreign exchange market of Ukraine should continue the process of liberalization of the currency, reducing the NBU intervention and authorities in the foreign exchange market. The advantages of liberalizing the foreign exchange market are: - Empowering national institutions and organizations in foreign loans; - Intensification of FDI inflows; - Encouraging the development of financial markets and the sector of non-bank financial intermediaries; - Improvement of the infrastructure of the currency market, the development and dissemination of foreign exchange derivative instruments and insurance against currency risks; - Strengthening the process of exchange rate market principles; - Reducing the transaction costs of economic operators by eliminating the need to find ways to circumvent exchange controls. The main disadvantages of liberalization is the inflow of speculative capital and significant changes in the exchange rate of the national currency. In addition, the floating exchange rate significantly enhances the cyclical development of the economy, as in the case of the appreciation of the currency is limited to exports and declining production and employment in the relevant fields, and in the case of depreciation of more expensive imports and inflation increases. In order to reduce risks to a minimum specified, the following prerequisites macroeconomic liberalization - The level of capitalization and financial stability of domestic banks (which will enable them to withstand higher competition when domestic financial markets come branches of foreign banks, which tend to provide higher service quality and lower cost banking services); - Convergence of domestic and world interest rates (which lets you avoid unwanted short-term speculative capital inflows); - Increasing monetization of the economy; According to experts, only the level of monetization of 48% can be achieved by reinforcing the role of foreign investment in ensuring growth processes [1, p. 27]; - Prevention of significant budget deficit and promoting prudent fiscal policy (particularly dangerous during liberalization is financing the budget deficit through government securities among non-residents, enabling additional inflow of foreign capital mainly speculative). An important step towards the liberalization of currency regulation is to increase exchange rate flexibility. But the banking system has a number of risks in terms of a flexible exchange rate regime, namely: - Negative change of course in relation to the open currency position of the bank; - Fail to meet obligations due to increased debt amount in case of an unfavorable exchange rate dynamics that lead to forced replacement of some other deals, but for the less favorable exchange rate; - Compliance with standards of liquidity in the event of unfavorable exchange rate. In terms of exchange rate variability important for the stability of the banking system will regulate open positions of banks in foreign currency i compliance with the liquidity ratios of weighted lending policies, improving the quality of monitoring borrowers' solvency and target leverage and increased control over compliance sizes it assets liabilities by maturity. An important element of effective implementation of the floating exchange rate is to study the international experience [2, p. 45]. For example, New Zealand since the mid 1980s for several years, moving from a regulated system of fixed exchange rate to a fairly liberal environment with an open capital account and floating exchange rates. In 1984 began the extensive process of financial liberalization and deregulation, which included, in fact, the rejection of all foreign exchange controls, including control the current account, the transition to indirect instruments of monetary policy. In terms of the floating exchange rate regime the central bank retained the right to intervene in the foreign exchange market, but use it very rarely right. After the transition to flexible exchange rate regime volatility of capital flows and, to some extent, the exchange rate increased, but through indirect instruments of monetary policy regime had the ability to control the influence of volatility in inflation. Hungary began liberalizing the foreign exchange market in 1995 to counteract the pressure upward exchange rate caused by capital inflows, implemented interventions corridor widened to ± 15%. In Poland, the need to change the strategy of monetary policy matured in 1998. Significant differences in interest rates i substantial economic outlook led to the arrival in the country of foreign currency, which undermined the stability of the currency market. Since April 2000 the zloty has a floating exchange rate i will not be subject to any restrictions. Central Bank of Poland does not aim to determine the zloty exchange rate to other currencies, however, reserves the right to intervene in the foreign exchange market, if it considers it necessary. The experience of these countries shows that the liberalization of the foreign exchange market should be combined with the preservation of selective exchange controls volume and structure of short-term foreign capital having the nature of the debt (for example, portfolio investment and non-resident deposits placed with the National Bank). Gain control over speculative capital flows must offset the reduction of direct government intervention in the foreign exchange market. Note that due to poor development of modern Ukraine currency market liberalization should be gradual, according to the origin of the necessary financial background. Conclusions. Success currency liberalization is to create an effective mechanism for distribution of funds received channel foreign investment into the best areas of economic activity therefore at the present stage of development of the foreign exchange market should focus on a comprehensive liberalization of domestic currency environment through the following main activities: - Strengthening of market principles exchange rate process while preventing the introduction of algorithms substantial coursework jumps; - Increase transparency of the foreign exchange market; improve the mechanism and rules NBU intervention in its activities; - Increasing foreign exchange controls for short-term capital that is the nature of the debt (for example, the introduction of limits on the size of shares that can be owned by non-residents); - Further development of tools insurance against currency risks, the spread of outstanding currency derivatives; - Accelerate the process of creating a modern national depository system, capable of handling securities transactions in the integration and globalization of securities markets both nationally and internationally. These measures will help to move to a qualitatively new mechanism to ensure stability of the exchange environment based on the principles of market self-regulation. Thus, we can conclude that the implementation of monetary policy is carried out according to the objectives, the main ones now is to ensure the stability of the currency market. By stability, we mean this dynamic course that varies in certain narrow limits, eliminates abrupt changes and does not violate the existing guidelines for the future. The above interpretation of stability allows the central bank in the course of its policies promote a desired exchange rate dynamics, which could act as an important factor positive impact on inflation, overall financial stability and external price competitiveness of Ukrainian economy. But this minor variations of the basic value of the hryvnia currency formation rate should not cause concern in society overall sustainability of the course and the ability of the central bank to influence the situation in the event of significant fluctuations need leveling.