Ukraine Aid Limbo Deepens Reserves Squeeze: East Europe Credit

KIEV, Ukraine -- Ukraine is running short of time to end a political stalemate and win more international aid from either Russia or the West as foreign-currency reserves shrink and hryvnia losses accelerate.

500 Hryvnia = $56.34 ($1.00 = 8.875 Hryvnia)

Reserves probably contracted to $18.8 billion in January from $20.4 billion a month earlier, according to the median estimate of seven analysts surveyed by Bloomberg before the central bank publishes the data by Feb. 10.

That would tie November for the lowest level since 2006, before Russia pledged $15 billion in emergency loans a month later.

The dwindling war chest and collapsing hryvnia, which weakened to a more than a four-year low today, are a risk to Ukraine’s financial stability, according to Fitch Ratings.

They also threaten to intensify a selloff that has made the nation’s bonds the worst-performing in Europe this year, even after a rebound this week amid speculation an aid package may be forthcoming from the European Union and the U.S.

“Ukraine’s international reserves (UAINRSL) are too low to defend the exchange rate, and I’m not too optimistic on the political situation,” Viktor Szabo, a money manager who helps oversee $10 billion at Aberdeen Asset Management Plc in London, said by e-mail yesterday.

“I can’t really envisage a U.S./EU package of adequate size. Last year there was an opportunity to provide support but that ship has sailed.”

Russian Aid 

Russia, which bought $3 billion of Ukrainian bonds in December, has delayed the next tranche of aid to ensure its neighbor doesn’t reverse President Viktor Yanukovych’s rebuff of an EU cooperation deal.

A failure to embrace the EU may mean a continuation of the biggest anti-government rallies since Ukraine gained independence in 1991, which have killed seven protesters and helped turn the country’s bonds into the worst performers in Europe this year.

Ukraine’s dollar bonds have handed investors a 3.2 percent loss since Dec. 31, the worst among 13 countries in emerging Europe tracked by the Bloomberg Dollar Emerging Market Sovereign Bond Index, which has dropped 0.5 percent in the period.

The hryvnia, managed by the central bank, slumped 1.1 percent to 8.8750 per dollar today by 2:42 p.m. in Kiev, the weakest level since September 2009, according to data compiled by Bloomberg.

The currency extended its slump this year to 7.2 percent, the biggest drop worldwide after the Argentine peso.

Controlling Depreciation 

A controlled depreciation “isn’t necessarily a bad thing for Ukraine,” Charles Seville, director of Fitch’s sovereign group in London, said in a Feb. 3 interview.

An “uncontrolled” decline would pose a threat to the financial industry, while a sharp drop in reserves or a worsening of the political situation would probably lead to a downgrade, he said.

“I don’t think we are in that situation yet,” he said.

“The central bank is still selling dollars.”

The hryvnia will weaken to 9.71 per dollar in three months, representing 8.6 percent depreciation from current levels, trading in non-deliverable forwards shows.

The currency will slide to 10.41 in a year, the contracts show.

While Ukraine’s political crisis is putting pressure on the hryvnia, there is no economic reason for the weakening, acting Prime Minister Serhiy Arbuzov said today in Kiev.

Ukraine has an equivalent of $5.67 billion in government debt maturing this year, including a $1 billion dollar note in June.

It faces a further $3.81 billion in interest payments in 2014, according to data compiled by Bloomberg.

Current Account 

Ukraine’s dollar bonds slumped today, lifting the yield on notes due in June by 95 basis points, or 0.95 percentage point, to 13.93 percent.

The rate fell 171 basis points in the previous two days as prospects of western aid emerged.

The yield on the dollar notes maturing in April 2023 rose 13 basis points to 9.84 percent, according to data compiled by Bloomberg.

The opposition urged lawmakers to curb Yanukovych’s powers yesterday, a week after the resignation of Prime Minister Mykola Azarov’s government prompted Russia to delay further aid.

The EU and the U.S. are considering emergency funding for Ukraine if a new government is formed, U.S. State Department spokeswoman Jen Psaki said Feb. 3. 

Fitch rates Ukraine’s debt B-, six levels below investment grade and on par with Egypt.

Standard & Poor’s and Moody’s Investors Service each cut Ukraine rating in the past week.

The nation’s current account deficit narrowed to $4.77 billion in the fourth quarter from a record $5.89 billion in the third quarter, data compiled by Bloomberg show. 

IMF Deal 

The cost of insuring the country’s debt with credit-default swaps rose 47 basis points to 1,028, according to CMA data.

CDS for Egypt traded at 490 basis points.

Yanukovych’s government quit bailout negotiations last year with the International Monetary Fund, which had urged the authorities to increase the flexibility of the exchange rate and streamline public finances.

It isn’t clear if a potential EU and U.S. aid deal would include the IMF. 

An IMF-backed bailout would require “long discussions” and impose “harsh conditions,” said Lutz Roehmeyer, who oversees $1 billion of emerging-market assets, including bonds from Ukraine, at Landesbank Berlin Investment in Berlin.

The country would have to stop energy subsidies, cut the budget gap and weaken the hryvnia, Roehmeyer said by e-mail yesterday.

“The market thinks that fast money out of Russia with no big changes in Ukrainian politics and lesser strings attached is more credible and generous than the IMF package,” Roehmeyer said.

“The Russian package is the sweeter deal for now. It is longer-term unsustainable, so longer-term Ukraine has to fix all issues and should go the European way.”

Source: Bloomberg