Feb. 13 (Bloomberg) -- Ukraine’s hryvnia weakened against the dollar after Fitch Ratings downgraded the country yesterday and the finance minister resigned, deepening concern the former Soviet republic won’t be able to shore up the economy.

The currency, which has slumped 52 percent versus the dollar over the past six months, dropped 0.6 percent to 8.0550 per dollar by 1:46 p.m. in Kiev, paring a 0.9 percent advance this week. It lost 0.9 percent to 10.3549 per euro.

Fitch yesterday reduced Ukraine’s credit rating to B, five levels below investment grade, the same day Finance Minister Viktor Pynzenyk submitted his resignation after saying the post had become “hostage” to politics. Pynzenyk objected to the parliament-endorsed budget for 2009, which plans for a budget deficit of 2.97 percent of gross domestic product in violation of the country’s $16.4 billion loan agreement with the International Monetary Fund.

“It’s negative news, it’s unwelcome news as the situation in Ukraine is deteriorating,” said Ali Al-Eyd, an emerging markets fixed-income analyst in London at Citigroup Inc. “Ukraine is going to be hit with a vicious slowdown.”

The political instability in Ukraine during the worst global financial crisis since the Great Depression puts the country at risk of a banking and currency crisis, Fitch said yesterday. The outlook for the nation’s ratings was kept at “negative,” indicating that it may be reduced further.

Fitch predicts the economy will shrink 4.5 percent this year, and Citigroup may revise its current forecast of a 3 percent contraction “much lower,” Al-Eyd said. Ukraine, dependent on exports of steel and other products as the global economic slowdown depresses demand, is struggling to fund a $12.3 billion current-account deficit amid the seizure in credit markets.

‘Unhelpful’

Pynzenyk led the Ukraine side in negotiations with the IMF, making his departure “unhelpful” to the progress of the talks, Al-Eyd said.

The central bank has been trying to stabilize the hryvnia by buying and selling foreign currency “regularly,” according to Serhiy Kruhlik, the bank’s head of investor relations. It also reduced the amount of overnight loans available to banks and cut borrowing auctions to once a week, from eight times a month, Kommersant-Ukraine reported Feb. 6, citing a central bank resolution.

The downgrade and political turmoil in Ukraine may cause the hryvnia to depreciate as much as 11 percent to between 8 and 9 per dollar in the first half, Win Thin, senior currency strategist in New York at Brown Brothers Harriman & Co., the oldest privately owned bank in the U.S., wrote in an e-mail to clients yesterday. “Market sentiment on Ukraine and on eastern Europe is likely to remain negative.”

To contact the reporter on this story: Emma O’Brien in Moscow at eobrien6@bloomberg.net

Last Updated: February 13, 2009 08:06 EST