Fall in hryvnia raises questions over sustainability of Ukraine's debts

By bne IntelliNews September 24, 2014

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The continuing fall in the value of the  hryvnia is raising questions over Ukraine's ability to service its sovereign debt.

The hryvnia  hit new all-time lows after President Petro Poroshenko returned from the US empty handed last week. After starting 2014 at UAH8 to the dollar, the hryvnia is heading for the UAH16 mark or a 50% devaluation, crossing the UAH15 mark on September 23 on the interbank market, and continuing to slide. 

The slide in the value of the hryvnia amid an economic meltdown - largely because of war in the east of the country  - may bode ill for the country's ability to service its foreign debt, according to rating agencies, investment banks and analysts. 

Olena Shcherbakova, head of the monetary policy department at the NBU, said on September 23 that purchases of hard currency by the population exceeded sales by $230m so far in September. 

In a clear sign of panic, the fall in the hryvnia prompted the National Bank of Ukraine to restrict sales of hard currency to the population to around $200 per day. But in reality it is currently nearly impossible to buy dollars in Kyiv.

"It’s no surprise to see growing individual demand for foreign cash that’s merely being fuelled by panic amid the scarce supply of foreign currency for the population," wrote Concord Capital's Aleksandr Paraschiy.

Analysts are now calculating the implication of the slide in the currency for Ukraine's public debt, mostly denominated in foreign currency. According to Fitch Ratings,  the ratio of government debt  - including sovereign guarantees  - to gross domestic product has quadrupled since 2008, reflecting exchange rate depreciation, fiscal deficits, low growth and off-budget costs such as recapitalisation of banks and Naftogaz. 

According to a Goldman Sachs analysis quoted on Business Insider, "severe economic weakness is likely to cause public debt to rise to 70% this year and 77% next year, above the IMF’s “high-risk threshold” for debt sustainability. These downside risks to our forecasts further call into question the sustainability of Ukraine’s debt trajectory."

"The NBU is really struggling to defend the UAH, as exports are collapsing, and sentiment with it," wrote Tim Ash of Standard Bank in a note. "And what about Western support? Well I think there was an argument that Ukraine was simply too important to fail - but let's face it, Poroshenko went to DC and made the speech of his life (…) and got absolutely ‘nada’ from Obama," he added. 

"I guess the concern here now is that looking forward, Ukraine may end up re-restructuring, rather as did Greece before, even after getting an IMF programme," Ash concluded.

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