Ukraine, Ex-Soviet Currencies May Drop More, Deutsche Bank Says

KIEV, Ukraine -- The currencies of Ukraine, Kazakhstan and other former Soviet republics may still have to be devalued by as much as 20 percent as their economies readjust amid the global financial crisis, Deutsche Bank AG said.

Ukrainian currency

Ukraine’s hryvnia has lost 38 percent versus the dollar over the past six months as the central bank drained a third of the country’s foreign-currency reserves striving to arrest the drop.

Nearby Kazakhstan, Belarus and Armenia all allowed their currencies to weaken around 20 percent since January, as credit markets seize up in the worst financial crisis since the Great Depression and demand for their exports slump in first global recession since World War II.

“In some cases an additional round of depreciation of as much as 20 percent may be warranted,” Yaroslav Lissovolik, chief economist in Moscow at Deutsche Bank, the world’s largest currency trader, said in an interview in the Russian capital late yesterday. “We expect another round of weakness on the external outlook, including Ukraine.”

Nations throughout emerging Europe are having to ease their fixed currency regimes as the global recession saps growth and leaves countries like Ukraine struggling to fund current-account deficits in the absence of foreign investment.

Belarus, Ukraine and Armenia are all receiving bailouts from the International Monetary Fund, while Kazakhstan has bought stakes in some of its largest banks as the 58 percent drop in oil prices over the past six months threatens to end a decade of economic growth.

As Ukraine’s economy contracts 6.2 percent, the hryvnia will probably slide 13 percent to 9.2 per dollar by the end of this year before weakening further in 2010, Lissovolik said. The hryvnia was unchanged at 7.9999 per dollar by 2:57 p.m. in Kiev today, according to Bloomberg data.

Hryvnia Defense

The Natsionalnyi Bank Ukrainy has already raised the country’s refinancing rate to 18 percent, restricted withdrawals from banks and warned lenders against buying and selling the currency at a weaker level than an average daily rate set by the central bank as a way of stopping the hryvnia’s hemorrhage.

Still, as the nation heads toward elections expected by early next year, “there will be more populism and more pressure to inject liquidity” which banks may convert to foreign currency, depressing the hryvnia, Lissovolik said.

Kazakhstan’s tenge has held steady around 150 per dollar since Feb. 4, when the country’s central bank allowed the managed currency to weaken 21 percent. Nearby Russia, meanwhile, let the ruble drop 44 percent against the dollar from a July record as Urals crude, the nation’s chief export blend, slumped 67 percent and the economy heads for its first recession since its 1998 debt default.

Kazakh Profile

Kazakhstan, which holds 3.2 percent of the world’s oil reserves according to BP Plc, has a similar economic profile to Russia and so is under pressure to let the tenge fall at least as much as the ruble, Lissovolik said.

Kazakhstan is also not receiving an IMF loan “like most of the other problem countries in the region” he added. A decline of as much as 20 percent from current levels would leave the tenge at about 190 per dollar, based on Bloomberg calculations.

The Belarusian ruble was devalued 21 percent to 2,656 per dollar on Jan. 6, six days before the IMF, which advocates flexible exchange rates, approved a $2.46 billion credit line.

Armenia allowed the dram to float freely on March 3, spurring a 20 percent drop against the dollar, as the IMF said it would provide the country with a $540 million loan. A 20 percent drop would leave Belarus’ ruble at 3,300 per dollar and the dram at about 470, from today’s 374.25 per dollar.

Source: Bloomberg

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