Investors and bond traders were jittery after the first week of August when the hryvnia fell below the psychologically important UAH27 to the dollar mark. With international currency reserves now at the minimum "safe" level and almost $1bn of coupon payments to make in the autumn, the government is going to struggle to meet its commitments. If the state has to dip into its reserves again the hryvnia's value could start to slide against the dollar in the coming months say analysts. 

Analysts say the slip in the currency was part of the natural devaluation that happens in the autumn when tax bills come due, but the seasonal trend started early this year.

The fall was also linked to a moderate fall in the country’s gross international reserves (GIR) to $17.748bn, close to the three months import cover economists believe is needed to ensure the stability of the national currency. Ukraine’s gross international reserves slid 1.3% m/m, or $230mn, to $17.7bn in July, the National Bank of Ukraine (NBU) reported on August 7. The losses were due to foreign currency-denominated debt repayments that exceeded receipts from a local Eurobond placement and net currency purchases by the central bank. As of August 1, Ukraine’s gross international reserves covered 3.0 months of imports. 

“Ukraine’s gross reserves have now declined to the minimum accepted “safe level” of three months of imports. With foreign currency supply on the foreign currency exchange dwindling in the last two months, the NBU has lost the ability to replenish reserves through currency purchases. At the same time, demand for local Eurobonds has declined in recent weeks,” Evgeniya Akhtyrko of Concorde Capital said in a note.

“We are likely to see further losses in gross international reserves in August due to relatively high payments on foreign debt. In particular, this includes an IMF repayment of about $600mn, as well as repaying and servicing local Eurobonds worth $384mn. We expect the government will make an effort to raise more foreign currency with the sale of local Eurobonds this month. However, this alone won't compensate the debt repayments,” Akhtyrko added.

“With its worsening ability to raise foreign currency, we expect Ukraine’s gross reserves will fall around $400mn during August to well below the “safe level” of three months of imports. This will trigger a downward spiral, as the continuously declining reserves will harm Ukraine's prospect on the global debt markets. The main factor that can stop this spiral is an IMF loan tranche, which is critical for bringing Ukraine's gross reserves back above the "safe level" and restoring foreign borrowing,” Akhtyrko concluded.

On a 12 month basis Ukraine’s current account deficit amounted to $2.8bn, up from $2.4bn last year. Ukraine’s current account was reported in deficit of $125mn in June. This was a reversal from the $23mn surplus posted a year ago.

“In line with the previous month, the growing trade deficit was the main culprit behind the worsening current account performance. At the same time, the trade deficit slightly improved compared to numbers reported a month ago,” Ukrsibbank said in a note.

“While external trade continues to worsen, resilient export prices will help to offset (albeit partly) negative impact coming from accelerated consumer imports and higher energy prices. The risks to FX rate stability are increasing and we expect another round of renewed pressure on UAH, retaining our end-year USDUAH forecast to 29.50,” the bank added.

More worryingly, the central bank’s treasury account — the account it uses to make day to day payments — fell close to zero this week: Ukraine is facing the sovereign equivalent of a cash flow crisis.

“We expect hryvnia devaluation to lose steam in the nearest future, provided the withdrawal from the market large amounts of banking liquidity via accelerated selling of the FX currency on the market in the form of NBU interventions,” Ukrsibbank said in a note.

The NBU resorted to three currency auctions during a single week ending August 3, and started to use this tool for the first time since April.

At the first auction last week, the central bank intended to sell $50mn, but the auction resulted in only a more modest $28.1mn of sold foreign exchange currency from international reserves.

In the second auction the NBU initially wanted to sell $100mn and the demand from the banks exceeded that volume, resulting in the NBU netting the full $100mn.

In the third auction during the week, demand again exceeded the $50mn the NBU was offering.

As a consequence, roughly $0.2bn was removed from the international reserves during only one week using only one tool.