Ukraine's currency seen close to collapse

By bne IntelliNews December 9, 2013

bne -

As the charts here show, Ukraine's hard currency reserves have fallen so dramatically that the national currency, the hryvnia, is now hanging in the air like a cartoon character that ran off a cliff, but hasn't yet noticed it is supposed to fall.

And things are about to get worse. As the demonstrations in Kyiv and other cities go into their second week, the population has started buying up dollars in anticipation of a devaluation. The hryvnia/dollar rate has already slipped from UAH8.14/USD1 to UAH8.29/USD1 and there are reports that the banks (hotly denied by them) have started to limit the availability of the dollar. A crash looks very close.

Ukraine badly needs several billion dollars - and very soon. Ukrainian President Viktor Yanukovych was in Moscow on December 6, reportedly asking for a $12bn loan to tide the country over. If this or money from any other sources like the International Monetary Fund is not forthcoming, then the currency's slide could start as soon as this week and be shortly followed by runs on the banks.

The US: hyrgna exchange rate has started to slide in recent weeks, reaching UAH 8.29 last week. Analysts are expecting the demand for FX to rise sharply, while sellers seem to have cut supply of FX, recording to reports. Some banks have been reportedly limiting the access to foreign currency although most deny this.

More worryingly and easy to see is the government bond yields rates have soared on the spot market reaching 9.14/9.39 for the six months notes.

Having held the currency steady agains the dollar or almost five years it appears now that the National Bank has finally conceded that it will have to let the currency depreciate against the dollar, analysts say.

In September-November the hryvna has already gone from 8.14 to 8.23 per dollar. The central bank has intervened in the market several times to reduce the volatility, but it has been unable to halt the currency slide. As pressure on the hryvna mounted the NBU has intervened on the market twice within the last four days as the chart above shows.

Ukrainian President Viktor Yanukovych is increasingly being forced to pin all his hopes on Russia coming to the rescue with a big bail out loan. But the Kremlin is playing hard to get and a loan is looking like an increasingly distant possibility.

"Now it is becoming evident that Russia has taken a tough position towards Ukraine, being in no rush to back up its ailing neighbour," says analysts at one Ukrainian bank.

Taken into account the scale of the pro-EU demonstrations, it appears that a possibility of considerable improvement of Russia-Ukraine relations has is falling. The constant flip-flopping of the government in Kyiv is not exactly encouraging local investors either.

The time for haggling is rapidly running out. Next year total annual forex payments (incl. Naftogaz Eurobonds) stand at around $9.2bn, which raises questions about Ukraine's ability to meet its forex debt obligations. There is no data on the NBU reserves in November, but analysts widely expect them to fall below the psychologically important level of $20bn.

Debt redemptions in the next two quarters will be crucial. While December and the first quarter of next year the forex debt payments look moderate ($1.7bn in total), later in the year looks more challenging.

In the second quarter debt payments are estimated to rise to $2.8bn, not counting Ukraine's huge gas bill.

If these fears all crystalise with corporates and the population then the demand for dollars could spike and tip the banking sector over the edge.

Until now the net retail demand for forex had been moderate, but given tension on Maidan have escalated and will continue to escalate, demand for dollars by the population could easily reach $2-3bn in December, depleting the already low reserves further. At the end of October, NBU FX reserves covered only 70% of total retail deposits, which were $30.4bn as of November 1.

"If the population rush to the banks for dollars the regulator will have to resort to non-trivial steps to prevent the local currency from plummeting," says one banker that wants to remain anonymous.

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