Ukraine close to financial crisis, claims opposition, as election looms

By bne IntelliNews October 11, 2012

bne -

The Ukrainian government is under increasing pressure ahead of the upcoming parliamentary elections on October 28, as economic indices slip dangerously.

Recently, foreign exchange rates have spiked, even as the National Bank of Ukraine (NBU) attempts to maintain stability for the hryvnya. Since October 5, local interbank interest rates have surged, at times as high as 40%.

According to VTB Capital estimates, NBU forex interventions to support the currency amounted to $1.4-1.7bn last month. "As Ukraine is scheduled to repay the IMF $1.4bn in 4Q12, and the last months of the year are typically 'difficult', we expect to see a further decline in NBU reserves in the months to come," the analysts say.

Ukraine's international reserves sank to $29.99bn at the end of August, constituting 3.4 months of import cover. Economists tend to set a benchmark of 3 months cover to ensure currency stability. All this is happening on the back of slowing real sector activity, which was reflected in an inflation rate of zero for the second consecutive month in September.

Opposition leaders are attempting to use the situation to attract voters in the last two weeks before the election. Petro Symonenko, head of the Communist Party of Ukraine (CPU) claims Ukraine is on the verge of another financial crisis, warning that recession is certain unless Ukrainians vote for change.

Ukraine has lost the bulk of its international reserves, and the vital agriculture sector is practically stagnant, he claimed, adding that large-scale industry and other important spheres are now in decay. "Today the whole world is on the verge of a third financial crisis. While most countries are getting ready for economic problems in advance, Ukraine [risks] collapse," he insisted, according to Interfax-Ukraine.

However, Prime Minister Mykola Azarov refuted the criticism, claiming that the government is in control of the situation. Pointing out that Kyiv has reduced gas purchases, which drain foreign currency, he said action to stem the drastic reductions in reserves are underway.

"We are implementing policy aimed at development of the domestic market," he told journalists, saying this "positively influences the balance of payments; the country is receiving more currency than it spends on imports of goods, and the country's currency reserves, which are at the pre-crisis level now, don't require foreign assistance."

Largely cut off from international debt markets by its fading fiscal position, Kyiv is now hoping to raise UAH6.9bn ($900m) of fresh debt in the final quarter of the year on the local market. VTB Capital analysts point out that the targeted volume coincides with local debt redemptions ahead of the end of the year (UAH7bn in the fourth quarter), and note that local debt auctions have already raised $6bn this year.

Another potential source of fresh debt targeted by Kyiv is the local retail market. On 10 October, the Ministry of Finance started selling FX treasuries to retail clients and expects to complete the placement of $100m within two months. "With the new type of sovereign bonds, the government expands its ability to find financing on the local debt market. We expect the Finance Ministry to successfully place the current $100m issue." Foyil Securities analysts write.

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