Download Yu.P. Makarenko Foreign exchange market liberalization and

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.