Monday, March 24 2014 20:27
Expert: Gradual depreciation of Armenian dram amid exchange rate 'imbalances' in the region almost inevitable
ArmInfo. Gradual depreciation of the Armenian dram amid devaluating 'post-Soviet' currencies is almost inevitable for Armenia, a dealer at one of the leading trader companies in the post-Soviet area, who prefered to remain anonymous, said in an interview with ArmInfo.
Commenting on key reasons of Russian ruble's depreciation and possible response to the developments of the recent weeks by the Armenian dram, the dealer said that the situation with the post-Soviet currencies and the Russian ruble, particularly, remains certainly volatile. He explained that the US monetary policy is the first reason of such situation. "The United States are terminating 'the quantitative easing' and returning investors to the West," but the last weeks' political developments around Crimea have had their 'side effect' on the depreciating Russian currency, which has fallen 10% since early 2014.
He recalled that other currencies of the post-Soviet area, particularly the Ukrainian hryvnia (deprecated 25% against US dollar) and Georgian lari (depreciated 5%) experienced the fate of the Russian ruble. The same happened to the Kazakh tenge (20%) and even Turkish lira (15%). As for the Armenian dram, the dealer said, it has so far depreciated 2% since the beginning of the year..
Quite similar situation happened in the region in 2009: "depreciation of the Armenian dram in March followed the February depreciation of the Kazakh tenge and Georgian lari. The financial systems of these three post-Soviet republics resembled each other in 2009." The dealer could not say if that scenario will repeat this year, but he brought two possible and one hypothetical scenario of how the exchange rate of the dram will be changing amid accelerating devaluation processes in the big CIS countries that are forming the Customs Union."
The first and the most probable scenario is the so-called "Georgian scenario" when the national dram will be gradually depreciating by 0.5%-1% every month and then stabilize (like it is happening now in Georgia).
"For developing economies, namely, for the export-oriented ones, the gradual depreciation of the national currency is always favorable, except the cases of hyperinflation or serious inflation expectations." Only global changes in the world financial market, which are little probable, may prevent that scenario.
The second scenario implies maintenance of the current rates through active interventions by the Central Bank. The expert could not say, however, if the mega regulator will continue to spend the foreign exchange reserve. By data of ArmInfo's Financial Service, since the beginning of 2014, the Central Bank has injected nearly $120 million to the currency market to prevent plummeting of exchange rates and speculations on it. Nevertheless, the Central Bank will hardly continue to curb the exchange rate intentionally. With its current exchange rate policy and through currency interventions, the Central Bank is softening the fluctuations. In this light, further curbing of the exchange rate by the CB may be considered certainly unreasonable, at least, because gold and foreign currency reserves in the country are extremely limited.
The threat of the national dram's depreciation amid above external and internal, political and economic processes, will diminish only in mid-April 2014, the expert said, as the currency market will finally come to balance by that time.
The expert presented another, the third "Kazakh scenario," but called it hypothetical and ruled out. The given scenario implied a new mid-term 'ceiling' for the national currency rate, for instance, 500 drams per 1 dollar. It would allow the CB to save gold and foreign exchange reserves.
Summing up the forecasts, the expert said that depreciation of the ruble by 10% will automatically lead to reduction of transfers (6%-8%). Nevertheless, this constitutes no serious threat to economy of Armenia, as it is 'very important in the given situation to find the very range that would allow avoiding shocks in the market and stabilize it.'
Publishing the comments of the currency dealer, ArmInfo Financial Service experts do not rule out even more pessimistic scenario for the mid-term outlook. Consumer demand in the country may even more decrease due to the slackening growth of Russia's economy and the long-term recession it is entering now. This becomes obvious from data of international financial organizations and American rating agencies. All this may, in turn, lead to a chain reaction and affect Russia's partner-countries, and Armenia first of all, as the country has not only strong trade and economic relations with Russia but also big direct money transfers that may experience decline like it happened in 2009. Unfortunately, the country fails to get rid of the syndrome of transfer economy so far, this peculiar 'Dutch disease' continues to undermine the government's efforts to form a relatively self-sufficient industrial economy in the country.
