Ukraine inching towards crisis as hard currency purchases spike

By bne IntelliNews November 13, 2012

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A devaluation of the hryvna that threatens to spark a financial crisis inched closer in October, as the National Bank of Ukraine reports that the population's purchases of hard currency spiked by 20%.

Fears of a devaluation have led to increased pressure on the currency, eating away at the country's reserves. The central bank has been dipping into its pocket to defend the hryvna, contributing to an almost $9bn drop in reserves to $29.2bn since August 2011. That leaves them below the lower limit which economists suggest is needed to ensure currency stability.

Analysts now estimate the hryvna is 10-20% overvalued. The exchange rate was UAH5 to the dollar for several years, but slumped to about UAH8 after the collapse of Lehman Brothers in 2008. It has lost another 2.2% this year, but will retreat to UAH9.4 per dollar in six months time, and to UAH10.42 in a year, according to non-deliverable forwards, reports Bloomberg.

However, authorities are moving aggressively to support the exchange rate, come what may, and recently re-introduced rules allowing the NBU to force exporters to sell half of their hard currency earnings to it as a way of shoring up the country's gross international reserves.

Thus, the government is nailing its colours to the mast and apparently intends to maintain exchange rate stability, despite the negative effective it is having on growth. In other words, Kyiv would rather introduce harsh currency controls likely to hurt business than let the exchange rate sink to its natural levels, which would hurt the population in the short term.

However, it seems the public are not buying into that story, and have started to prepare for a devaluation. In October, net purchases of foreign currency from banks hit $2.169bn, a 20% rise on September. Total purchases by individuals totaled around $3.3bn, and was offset by another $1.1bn of sales. Purchases were up 15% on the month, while sales rose 6%, the NBU said.

Those amounts are similar to purchases of hard currency a year ago, during the last devaluation scare. However, the country can ill afford to loose more of its reserves to the people. So far this year, Ukrainians have bought a total of $8.454bn more foreign currency than they sold and hold another $21.742bn in bank accounts.

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