 |
 |
 |
 |
Server Information System
Statistical Database
Express-analysis
Periodic Publications
Special Materials
Archive
EU VEDI |
 |
 |
 |
 |
| Back |
 |
| Foreign Exchange
Market
Forecast |
Foreign Exchange
Market
|
The situation on the foreign exchange market normalized in March after rather a long period of instability which was characterized by high rates of the ruble rate growth and a reduction of the Bank of Russia’s foreign currency reserves.
The situation on the foreign exchange market stabilized due to seasonal reduction (after the first months of the year) of demand for foreign currency from ordinary Russians and organizations, as well as non-residents’ activities associated with the inflow of foreign capital into the Russian market. According to estimates of Vedi experts, the total amount of foreign currency converted in March was equivalent to more than $1.5 billion.
The
growth of non-residents’ interest in Russian government securities affected
the situation on the futures currency market. The desire to hedge risks
of a fast growth of the ruble exchange rate, which grew after the March
23 government crisis, led to an increase in open positions on the MICEX
to nearly $500 million (The largest figure since the beginning of trading
in futures contracts on the MICEX). At the same time, the liquidity of
the liquidity of the futures market was rather low. In March, daily transaction
volumes on the futures market on the MICEX amounted to only $18 million.
In order to promote further development of the futures market, the Bank
of Russia decided to admit non-residents to the futures market on March
23.
The Central Bank of Russia also changed its exchange rate targets for 1998, assuming that the exchange rate may grow faster. When making this decision, the Central Bank was probably guided by the following considerations:
Maintaining
the stability of the real rate of the national currency was, and still
is, the main goal of the 1998 monetary policy. Since, according to forecasts,
inflation is expected to be 5.7% in Russia and 1.5-2.5% in the United States,
the stability of the real ruble rate suggested the growth of the nominal
exchange rate to 6.15-6.22 rubles to the dollar by the end of the year.
However, high rates of growth of consumer prices (inflation amounted to
more than 3% during the last three months alone) made the monetary authorities
to adjust their exchange rate forecast, especially under conditions when
it was necessary to support export-oriented industries. Therefore, the
real exchange rate will remain stable if the nominal rate grows to 6.3
rubles to the dollar, provided that Russia’s inflation amounts to 5-7%
in 1998 (official forecast), or if the nominal rate growth to more than
6.4 rubles to the dollar, provided that Russia’s inflation amounts to 8-9%
(independent experts’ forecasts).
The change of official exchange rate targets by the Bank of Russia accounted for the fact that the exchange rate continued to grow during the last month despite strong supply of foreign currency during that period. At the same time, large sales of foreign currency made it possible for the Central Bank top replenish its foreign currency reserves. They grew by $1 billion, or 1%, in March. The Central Bank’s foreign currency reserves grew for the first time since the beginning of the year. They decreased by 2% in January and practically did not change in February.
At
the same time, the results of the first quarter affirm the appearance of
a negative trend in respect of reserves. During the previous years, the
inflow of foreign capital into the Russian market was accompanied by a
corresponding increase in the country’s reserves, including the Bank of
Russia’s foreign currency reserves. By the beginning of the autumn 1997
financial crisis, non-residents’ funds invested in Russian financial instruments
amounted to the Bank of Russia’s foreign currency reserves and more than
80% of Russia’s gold and foreign currency reserves.
The
situation has changed recently. As Russia’s balance of payments is worsening
(while in 1996 Russia’s favorable current-transaction balance was $11.6
billion, in 1997 it amounted to about $4 billion, according to preliminary
estimates, and in 1998 it is expected to decrease to 0), the inflow of
foreign capital into the Russian financial market is no longer accompanied
by the corresponding replenishment of reserves. In late March, for instance,
non-residents’ funds invested in Russian securities amounted to two times
the Bank of Russia’s foreign currency reserves and exceeded Russia’s gold
and hard currency reserves by 30%.
Such a low level of reserves can not cover the possible outflow of non-residents’ funds from the Russian market. This circumstance, which was reflected in the downgrading of Russia’s credit rating by Moody’s international rating agency, makes the situation on Russia’s financial market rather unstable. If the crisis reoccurs and the outflow of foreign capital exceeds its inflow, a low level of reserves will significantly worsen the situation. Therefore, though the pressure on the foreign exchange market was reduced by the beginning of the second quarter, the situation that resulted from the developments of the first three months was worse that that at the beginning of the crisis (October-November 1997).
The equilibrium on the foreign exchange market was upset in the first days of April. Under conditions of political and economic uncertainty, the situation worsened after Sergei Dubinin’s interview to the Financial Times, in which Dubinin spoke about the beginning of the "soft devaluation" of the ruble in accordance with the rate of inflation in order to support Russian exporters. All sorts of comments on this interview in the media had a negative effect on the foreign exchange market. A fast growth of the ruble rate accounted for more active interventions by the Bank of Russia and, consequently, for the reduction of its reserves.
When forecasting changes in the exchange rate that may take place in 1998, we can point to several scenarios for the developments on the foreign exchange market:
1. Inertial scenario. The exchange rate will continue to grow at the rate observed in the first quarter of 1998. In this case, the ruble rate will reach 6.5-6.6 rubles to the dollar by January 1, 1999, growing by 10% during the year.
Traditionally, the exchange rate is growing at the fastest rate during the first several months of the year. Assuming this, we can adjust the inertial scenario and assume that the exchange rate will continue to grow at this month’s rate (about 0.6%). In this case, the ruble rate will reach 6.4-6.5 rubles to the dollar by January 1, 1999 (7.4-9-percent growth during the year).
2. Optimistic scenario. The inflow of foreign investors’ funds into the Russian market will continue in 1998. This will make it possible for the Bank of Russia to implement a policy aimed at gradual slowing of the growth of the ruble rate.
Gradual slowing of the exchange rate growth implies its reduction to 0.3-0.4% a month. In this case, the ruble rate will grew by 5-6% until the end of the year and amount to 6.3 rubles to the dollar by the start of 1999, which was initially forecasted by the Bank of Russia.
3. Pessimistic scenario.
The probability of this scenario is directly proportional to the probability
of the reoccurrence of a crisis characterized by a rapid increase in demand
for foreign currency. Under such conditions, the Bank of Russia will have
three possible ways of normalizing the situation on the foreign exchange
market.
- 3.1. Outside help. A large loan from international financial institutions (IMF) to help stabilize exchange rate movement will make it possible to preserve Russia’s foreign currency reserves and ensure slow growth of the exchange rate. At the same time, large foreign borrowings threaten Russia with loss of sovereignty.
- 3.2. Devaluation of the national currency. Insufficiency of reserves will account for the necessity to rapidly raise the ruble rate and reduce foreign currency reserves. If mass outflow of non-residents’ funds from the GKO/OFZ market continues (about 50% of the total volume), the Bank of Russia will have to allow the ruble rate to rise to 7.5-8 rubles to the dollar by the end of the year in order to preserve Russia’s gold and foreign currency reserves at about 50% of their present level. It should be remembered that the Bank of Russia’s upper limit on exchange rate fluctuations is now 7.15 rubles to the dollar.
- 3.3. Reduction of foreign currency reserves. The outflow of at least half of non-residents’ funds from the GKO/OFZ market under conditions when the exchange rate amounts to 6.1-6.2 rubles to the dollar will reduce the Central bank’s foreign currency reserves practically to nought and Russia’s gold and foreign currency reserves to $5-$6 billion.
The
above scenarios for possible developments on the foreign exchange market
in 1998 show that the Bank of Russia will be unable to achieve its exchange
rate targets without funds from foreign investors or international financial
institutions. The existing unstable situation on the foreign exchange market
will have a negative effect not only on the foreign exchange market, but
also on Russia’s economic development.
Up to list