Analysis: Ukraine Hryvnia Poised For Historic Low, No Further

KIEV, Ukraine -- Ukraine's hryvnia is poised to revisit its historic low of 9.5-10/$ in the next few months but the central bank is unlikely to let it slip beyond as the country gears up for a presidential election in January.

The currency has lost almost 15 percent in the past two months, pressured by a spike in scheduled foreign debt repayments by banks and the government as well as purchases of Russian gas for winter by state energy firm Naftogaz.

Analysts and dealers have long said that the third and fourth quarters of this year would be tough for those reasons for the currency, which lost half of its value in the last four months of last year as the global financial crisis hit Ukraine.

"We expect the market rate of the hryvnia to reach 9.5-10/$ this autumn but to return to 8.5-9.0/$ by the end of the year thanks to massive central bank intervention prior to the presidential election," Astrum Investment Management analyst Oleksy Vlinov said.

The Jan. 17 poll is the first presidential election since the 2004 "Orange" Revolution that swept President Viktor Yushchenko to power. With support in single percentage figures, Yushchenko is out of the picture for re-election, analysts say.

But front runners Prime Minister Yulia Tymoshenko and former Prime Minister Viktor Yanukovich are expected to conduct a fierce battle, with economic issues including the hryvnia's weakness taking centre stage.

The central bank, although independent of government institutions, will be under strong pressure to control the currency.

The bank, Tymoshenko and Yushchenko have blamed the hryvnia fall on speculation and said far better trade and current account data should have stabilised the hryvnia on a stronger level.

Analysts say however that while a long-held expectation of depreciation has to a degree become a self-fulfilling prophesy, there were fundamental economic problems behind the weakness which will not abate in the coming weeks.

"Objectively, the hryvnia's weakness is caused by the unbalanced current account and the lack of financial resources," said Oleksander Zholud, of the International Centre for Policy Studies.

"The daily fluctuations have a speculative character but this is a consequence, not the cause (of the fall)," he said.

Queues have formed outside banks in the past week as ordinary Ukrainians clamoured for dollars, although this did not signal they are losing faith in stability of the banking system. The rush was directed at a select few banks that managed to buy the central bank's dollars and were therefore able to offer bargain rates.


Debts due in foreign currency are higher this quarter -- the government has had to repay a $500 million Eurobond in August and is in the process of paying back a 768 million Swiss franc Eurobond.

Unless current restructuring talks are successful, the government will also have to help the ailing energy behemoth Naftogaz repay a $500 million Eurobond by the end of this month and state bank Ukreximbank must repay its $250 million Eurobond later this year.

Naftogaz, which needs constant financial help from the government, has also increased its purchases of gas from Russia -- for which it pays in dollars. August's bill amounted to almost $700 million.

All in all, in the third and fourth quarters the company is expected to spend almost $4.6 billion on Russian gas, a huge strain on the currency which becomes apparent in the days preceding the 7th of the month, when the gas bills are due.

The central bank is watchful of its reserves spent on supporting the hryvnia in almost daily interventions due to required levels of the reserves as set by the International Monetary Fund as part of its $16.4 billion loan programme. The latest tranche of $3.3 billion, disbursed just over a month ago, went directly to the government to help it plug a deficit and support Naftogaz' purchases of natural gas.

"This has reduced our possibility to intervene by $3.3 billion," the central bank's first deputy chairman, Anatoly Shapovalov, told a talk show last week.

The central bank has spent on average about $1 billion per month on intervention since the start of the year. But more IMF money may be forthcoming by the end of the year.

An IMF mission to assess the government's progress and decide whether to disburse another $3.8 billion by the end of the year is due by the end of next month. Ukraine could also use a global IMF cash injection via its special drawing rights.

The SDR allocation for Ukraine will total almost $2 billion by the end of the month.

"...The funding from the IMF global package should boost the FX reserves and give the (central bank) more room to support the hryvnia," ING analysts said in a note.

Source: Forexyard