by Yurii Oleksiienko
Inflation has been the main spot of attention for business, markets, and governments throughout the year, a benchmark showing a disastrous
acceleration worldwide. Our expertise here in use to assess the future measures and avoid mistakes.
The year 2021 was not easy for the world economy, which moved towards inflation while recovering. Ukraine’s balanced economy, consistent regulatory policies and attracted export markets for Ukrainian goods significantly reduced the shake-up for an average national. However, Ukraine did not escape the global trend of rising inflation, which exceeded the expectations of the NBU and increased by 10% over the past year. Prices soared at both supply and demand, slowing the post-pandemic recovery of the economy. The labour market encouraged inflation as the wages were increased to retain personnel. At the same time, increased energy costs moved up prices for consumer goods and transport services. However, there was a silver lining in the cloud: due to the rising prices for agricultural goods having significant share in its export output, Ukraine balanced its bottom line and kept the value of the hryvnia.
Unexpected threat of the Russian government to invade Ukraine became a trigger, which startled foreign investors consequently affecting the hryvnia’s value and OZDP yields in the last weeks of the year. As high inflation is a new normal worldwide (in the US, for example, it reached 7%), its negative impact on Ukraine’s economy to is to be continued over the next year. We have to be alert already at the beginning of 2022.
NBU is raising the discount rate
The inflation higher than expected at the National Bank made them implement more strict monetary measures. Over the year, the NBU was raising the discount rate 5 times, from 3% to 6%, which decreased inflation to 0.9% in October, to 0.8% in November, and to 0.6% in December, in the last quarter of the year. The Foreign exchange reserves dropped to 27 billion dollars in the first quarter, but the NBU restored gold and foreign exchange reserves to $ 30.9 billion. This was due to the strong exports of agricultural goods and IT services in the second, third and fourth quarters and availability of dollar in the domestic market. Slowing down the inflation due to the monetary measures is to be the major task of the National Bank next year as well.
The currency market and the hryvnia
Strong exports, a growing number of the currency transfers to Ukraine, and a downturn in household consuming influenced active supply of dollar in the foreign exchange market, which strengthened the hryvnia to the level of 26.05 UAH per 1 USD in November 2021. However, hostile statements by the Russian government to invade Ukraine disrupted the trust in the national currency of both local businesses and foreign investors. As a result, the hryvnia plunged by 4.7% over the last 7 weeks of 2021. Meanwhile, on a year-measured scale, the national currency remained stable and even strengthened by 3.5% from 28.27 to 27.28 UAH per 1 USD.
IGLBs and OZDPs: the trends of the year
The National Bank increased the discount rate by 3%, which prompted the increase in IGLBs yields along the entire repayment line, from 11.1% -11.4% to 12.4% – 13%. The IGLBs were in the same demand, allowing the Ministry of Finance to raise sufficient funds in the market for moderately rising rates. The dollar and euro IGLBs, yielding at 3.5% -4% and 2.5%, respectively, were in high demand and became a good alternative to foreign currency deposits.
Meanwhile, the threat of Russian invasion influenced sales of OZDP. By December 2021, the OZDP market fluctuated between 4.5% -5.5% of yields maturing in 2023-2028. The invasion statements by the government of the aggressor state escalated sales among OZDP holders. As a result, the yields rose to 9% -12% across the maturity line. High yields on Eurobonds encouraged the demand from local individuals and legal entities. OZDPs go at a higher level of risk than dollar IGLBs, but 11% -12% is a decent reward for those accepting the risk of technical default.
The stock market and the influence of the US regulatory policy
For the third year in a row, the US Federal Reserve is pushing the stock market to grow. The Fed’s soft monetary policy and high corporate profits in 2021 led to a significant increase in US indices: the S&P 500 and Dow Jones rose 26.9% and 18.7%, respectively. Tesla, Microsoft, Alphabet, Nvidia and Apple had the biggest impact on the S&P 500. They provided about a third of the growth rate. The UX index of the Ukrainian market, remained weak, rising 7.5% in 2021. The moving performer of the index fund were shares of PJSC Ukrnafta soaring by 51%. Better performance, paying off the 2018th and the distribution of profits for 2020 have enlivened the demand for the company’s shares. Despite the annual dividends, the shares of Raiffeisen Bank JSC were in a moderate demand and grew by 4.1% in
2021.
Given the above facts, we believe that domestic and foreign government bonds are the most attractive and reliable financial instruments.
