OREANDA-NEWS. On 28 April 2009 was announced, that the NBU resolution #107 on the exchange rate regulation took the effect on the interbank domestic market. According to the resolution the commercial banks are to include the reserves on foreign exchange loans in calculation of their net foreign exchange positions. This anticipates that long net foreign exchange positions (excess of foreign exchange assets over foreign exchange liabilities) of the commercial banks will be automatically increased by the amount of their foreign exchange loan reserves. In the case such a position exceeds the NBU's requirement (20% of the regulative capital) the commercial banks will need to decrease the amount of the foreign exchange on their accounts. Such a transformation on banks accounts may affect the demand and supply of the foreign currency which may change the exchange rate.

According to Millennium Capital’s estimation the commercial banks hold around UAH 35-40bn on their accounts in the form of reserves on foreign loans operations. This follows from NBU statistics and our estimate, suggesting that 9-10% of the foreign loans provided by the commercial bank are not standard, which require 100% of reserve deposition according to Ukrainian legislation. This anticipates that the reserve amount will be added to long net foreign exchange position of the commercial banks, which stood at UAH 11.2bn as of 1 April 2009 according to the NBU. Overall, total long net foreign exchange position of the domestic commercial banks will amount to UAH 46-51bn vs. UAH 26bn currently allowed by the NBU. As a result around UAH 20-25bn (USD 2.6-3.2bn) will be excess for the commercial banks to fit the NBU requirements.

Millennium Capital sees two ways these funds may be removed from the accounts of the commercial banks to fit the requirements:

1) The commercial banks may sell part of the excess foreign exchange on the interbank market in 2-3 months (period allowed by the NBU to fit the requirements).

2) On the other hand, the commercial banks might have placed such reserves in new foreign loans, which make their conversion to cash to be quite problematic. In such a case the commercial banks may denominate loans in the foreign currency to loans in the national currency at the favorable exchange rate.

The first way, if fully applied, will allow increasing foreign exchange supply by around USD 700mn per months on the interbank market. Meanwhile, the second way will decrease the demand for foreign currency the bank's clients by around USD 200mn per month. Since the second way is more probable to be take place on the domestic market, our weighted estimate is that the need in the foreign currency will decrease by around USD 250mn per month, which constitutes around 10% of the monthly foreign exchange market demand. This will decrease dollar pressure on hryvnia and favour its revaluation by around 9-10% to UAH/USD 7.3-7.2 in the next 2-3 months.

Millennium Capital is an integrated financial services provider. Established in 2000 by a group of professionals with solid background in securities and corporate finance, Millennium Capital is now one of the major investment banking institutions.