Ukraine’s Hryvnia May Fall 19% In Six Months As Economy Worsens

KIEV, Ukraine -- Ukraine’s hryvnia may tumble 19 percent against the dollar in the next six months as a deteriorating economy and dearth of foreign investment forces the country to abandon its management of the currency, according to five analysts surveyed by Bloomberg.

The hryvnia may slide to 10 per dollar by the end of August, according to the median estimate of the economists and currency strategists surveyed by Bloomberg yesterday.The hryvnia plunged 43 percent since August to 8.15 per dollar as the economy spiraled toward recession and the International Monetary Fund pledged $16.4 billion in emergency loans.“Ukraine is really facing an uphill battle,” said Lars Rasmussen, an emerging-markets strategist at Danske Bank A/S in Copenhagen, who forecasts the hryvnia will be at 10 per dollar in six months. “They need to be less focused on holding their currency and concentrate their money on other problems in their economy.”Ukraine’s economy may shrink 9 percent this year, as the worst global financial crisis since the Great Depression damps demand for its exports and leaves the former Soviet republic struggling to fund deficits in its current account and budget, according to HSBC Holdings Plc, Europe’s biggest bank.The nation’s reserves slid almost 9 percent to $29 billion in January, as the central bank “regularly” bought and sold foreign currency to control the hryvnia, according to its head of external relations, Serhiy Kruhlik.DeficitsThe analyst forecasts ranged between 8.5 and 11 per dollar. The hryvnia lost 1.2 percent against the U.S. currency this year. It was unchanged against the dollar yesterday and held at 10.4074 per euro, as UniCredit SpA said the Natsionalnyi Bank Ukrainy was intervening.Ukraine is struggling to fund a $12.3 billion current-account deficit amid the worldwide seizure in credit markets and a slump in the price of steel, its biggest export. The country’s banks face losses and writedowns worth $964.6 billion.The country passed its 2009 budget in December with a planned budget deficit of 2.97 percent of gross domestic product. Finance Minister Viktor Pynzenyk submitted his resignation last week in a dispute over the deficit, which violated IMF requirements. The IMF offered the loan on the condition Ukraine run a balanced budget.“The market is really nervous about them losing their IMF support,” Rasmussen said. “The IMF may use them as an example to say, look, we want to help but if you’re not fulfilling your side of the bargain, goodbye.”Fitch Ratings reduced Ukraine’s credit rating to five levels below investment grade at B last week, amid concern the economy will shrink 4.5 percent this year. Standard & Poor’s said today it may also cut the country’s rating because of concern the IMF loan arrangement may be at risk.

Hryvnia Falls More Than Most Currencies In 2008

KIEV, Ukraine -- The national currencies of Ukraine and Iceland, both recent recipients of emergency lifeline loans from the International Monetary Fund, lost more value in 2008 than any other countries, the respected Russian business daily Vedomosti revealed in a Feb. 2 report citing figures provided by Bloomberg.
The report, entitled “Friends in Devaluation,” goes on to describe Russia’s currency, the ruble, as also being battered heavily last year.According to Kyiv-based investment bank Dragon Capital, the hryvnia has been under mounting depreciation pressure since September due to rapid deterioration in Ukraine’s balance of payments.“In addition to a sharp contraction in foreign demand and declining world commodity prices producing a strong negative impact on exports, Ukraine’s external position was undermined by evaporating access to foreign debt capital, on which the domestic private sector and banks had relied strongly in the previous several years having accumulated $83 billion, (48 percent of gross domestic product) of debt by the first half of 2008.“The hryvnia’s rapid slump made it one of the hardest hit emerging market currencies worldwide. However, the bottom may still be ahead. With foreign demand for Ukrainian export commodities staying weak and the domestic political situation remaining volatile, fueling uncertainty over near-term monetary and fiscal policies, we do not rule out new downswings in the exchange rate in coming months. Our 2009 exchange rate forecast actually accounts for new possible fluctuations, envisaging an end-2009 rate of Hr 8.5 relative to the United States dollar and a rate of Hr 9.5 on average for the year."

Ukrainian Currency Slumps, Cbank Hopes Not Much More

KIEV, Ukraine -- Ukraine's hryvnia currency slumped to a new historic low on Thursday, but a senior central bank official said it was close to a balanced level based on economic fundamentals.
The weak currency, coupled with lower fuel and moderate gas prices, should help bring the current account into balance or a "minor" deficit and there was little chance of a sovereign or corporate default, Deputy Chairman Oleksander Savchenko said.The hryvnia weakened to 7.25-7.5 to the dollar on the interbank market after the central bank failed to meet demand for the dollar at Wednesday's auctions and in low volumes of trade because of the U.S. Thanksgiving holiday, dealers said. "The rate we saw today, yesterday and the day before, is somewhat shocking but it is a proper assessment by business not only of the balance of payments but of our political crisis," Savchenko told a conference organised by Fitch ratings agency."I hope the rate will be no more than 7 hryvnias per dollar, or somewhere in the region of 7 hryvnias. We feel that we are near a balanced rate."The hryvnia has been falling as the chief suppliers of the dollar to the market, foreign investors and Ukrainian exporters, have felt the impact of the global financial crisis. A fast accelerating current account gap has accentuated that weakness.Ukraine has already received the first tranche of a $16.4 billion IMF loan, whose conditions were greater currency flexibility, fiscal prudence and bank recapitalisation.The central bank has intervened almost every day since October, and carried out two dollar auctions in the past week, to stop the hryvnia's descent from spiralling out of control.POLITICAL RISKOnly half of the demand for the dollar, or about $150 million, was met by the central bank on Wednesday, dealers said, indicating that it is putting a brake on spending its reserves."If the central bank continues to spend its reserves, it will simply postpone the process of correction," Savchenko said.He also said companies and banks had $5 billion of foreign debt to pay off by the end of this year and $30 billion in 2009. With reserves at about $32.5 billion, "Ukraine has no risk of default", he said.Dealers said they expected further weakening on Friday."Because (banks) couldn't buy dollars yesterday, today demand is higher and most likely tomorrow the dollar will go even higher," one dealer said.The top economic aide to President Viktor Yushchenko, himself a former central bank head, said the bank should scrap its auctions as they only pushed the hryvnia lower by accepting the highest bids.The criticism reflects the latest political chaos that has pitted Prime Minister Yulia Tymoshenko against the president.The president called an early parliamentary election when a coalition in parliament collapsed, but has since postponed it. The lack of a majority leaves parliament unable to push through reforms needed for the IMF loan and to save the economy.The IMF set fiscal and monetary targets that Ukraine must meet to receive quarterly tranches. Its Ukraine representative, Balazs Horvath, told the conference that political risk to achieving these goals was "considerable but not insurmountable". Fitch said a failure to implement the IMF programme could trigger a further downgrade after it cut Ukraine's rating to B+ in October."World Bank and IMF support for Ukraine are of course a positive factor," Fitch Director of Sovereigns, Andrew Colquhoun said. "But in our view there are execution risks to the policy package which lies behind the support and therefore the risks to Ukraine's outlook remain elevated."

Crisis: How Much Must One Nation Suffer?

Crisis: How Much Must One Nation Suffer? -KIEV, Ukraine -- As the aftershocks of the global financial crisis start reverberating throughout the nation, Ukraine’s leaders were, for a second week, holding talks with the International Monetary Fund on a multi-billion-dollar emergency loan.
The leadership also struggled to adopt measures to protect the country’s economy amid political chaos and sharply sliding exports of key commodities, such as steel.The concerns for all Ukrainians, especially the poorest, could mount soon. The government will be forced to take belt-tightening measures in exchange for IMF help, increasing hardships for the poorest citizens. Meanwhile, an inflation rate that could hit an annual rate of 25 percent continues to erode everyone’s purchasing power.Speaking on television early Oct. 22, Prime Minister Yulia Tymoshenko warned that the government might reduce the state bureaucracy by 20 percent and freeze social social benefits, such as pensions, which are now indexed for inflation. “Ukraine has to tame its social appetites … we have to cut spending that Ukraine cannot afford,” Tymoshenko said.She insisted that nobody would experience cuts, but pensioners – many of whom make only $100 per month – will feel the most pain.As the week wore on, a faint silver lining emerged: President Victor Yushchenko and Tymoshenko appeared to finally start coming to an agreement about what needs to be done to save the economy.Tymoshenko earlier this month downplayed the world financial crisis’ affect on Ukraine. But in recent days, she has talked about emergency measures needed to minimize the expected big blow. The country’s export-oriented economy is sure to suffer.Tymoshenko assured citizens that the IMF was ready to provide an emergency loan to stabilize the country’s sliding currency and shaky banks, but offered no clarity as to how much funding would be provided and under what conditions.Reports suggest the IMF may provide a credit line of up to $15 billion.Yushchenko on Oct. 22 revealed that the nation’s central bank had this month burned through nearly $3 billion in reserves, leaving it with $34.6 billion. And some experts, such as economist Anders Aslund, suggested Ukraine needed “some $20 billion.”One day earlier, the president called for the creation of a rainy-day fund that could be used to bail out banks in times of need. He also said that measures should be taken to increase state insurance guarantees on bank deposits.Yushchenko halted his decree calling for early Dec. 7 parliamentary elections so that the Verkhovna Rada could adopt emergency laws. According to the president, the aim is to “prevent a recession from turning into a depression.”Yet the country’s lawmakers spent the first several days of the week feuding. It remained uncertain whether they would be able to come to a consensus on anti-crisis legislation and the divisive issue of when, or if, snap parliamentary elections would be held.Tymoshenko said that her government submitted economy-related draft laws to parliament and expressed hope that lawmakers would adopt them in the coming days. “The first is about protecting [Ukraine] from the world financial crisis; the second is on changes to the 2008 state budget,” she said.Changes in the budget are needed to finance early elections that Tymoshenko opposes as reckless in times of economic crisis. Experts said she also fears losing her job.But Yushchenko has not backed down on his call for a snap election. In a televised address on Oct. 20, the president said the elections would be held Dec. 14. He later admitted that they could be delayed further. But lawmakers loyal to the president and one of his other rivals, Victor Yanukovych, could muster enough votes to fund an early poll.“There are enough votes for that in the session hall anyway,” said Ivan Kyrylenko, faction leader for Tymoshenko’s bloc in parliament.So, as the country’s currency was under pressure and sliding, politicians focused on blaming each other for the economic crisis in an attempt to curry favor with voters.Experts said the hryvnia, which hit an all-time low of 5.9 against the dollar on Oct. 8, will inevitably depreciate further, as the value of foreign currency swelled due to a widening current account deficit.Experts said an IMF loan will free up reserves, allowing the central bank to walk the fine line between keeping the currency stable and bringing inflation under control.A recent IMF report predicted that Ukraine will continue having the highest inflation rate in Europe this year and next, 25 and 19 percent, respectively.And inflation is what Ukrainians fear most. A majority of Ukrainians expect to see prices rise significantly as a result of the world financial crisis or think that the crisis will not affect them at all, according to a telephone poll commissioned by Korrespondent.net, a sister internet publication of the Kyiv Post.According to the poll, nearly 50 percent expect a jump in inflation, 21 percent expect nothing, while 8 percent predict the complete collapse of Ukraine’s economy. Only 4 percent fear for their jobs, but the poll’s error margin is 5 percent because it only included 426 respondents.The poll found that older respondents are more concerned with inflation than their younger counterparts.Economist Ihor Burakovsky said the rate of inflation will depend on the extent of the domestic and world crises. But, he added, the cost for heavily-subsidized utilities will have to grow anyway, hitting the pocketbooks of the country’s pensioners.“Depending on the trajectory of the recession, the government will have to keep a close eye on the pension fund. Measures like indexing pensions to inflation make sense, but if the situation is very dire, then other measures will take priority,” he said.Economist Victor Lysytskyi, who has served at Ukraine’s central bank and in government, said the country can, if needed, offer support to the country’s most vulnerable households. “Ukraine currently has the opportunity to prevent the impoverishment of the most needy,” he said, without offering specifics.Ultimately, however, snap parliamentary elections will complicate the efforts of politicians to adopt constructive measures, he warned. “We can avoid a crisis if we say ‘no’ to elections and ensure the parliament and government function normally,” Lysytskyi said.