Ukraine’s Arbuzov Contradicts IMF With Reserves Forecast

Ukraine’s gold and foreign-currency reserves may grow by year-end should “positive economic tendencies persist,” the central bank said, putting it at odds with the International Monetary Fund, which predicts a decline.

While reserves shrank 4.7 percent to $29.3 billion in June, the lowest level in two years, the drop was mainly because the former Soviet republic repaid $600 million of Eurobonds and $1.1 billion loaned to it by Russia’s VTB Group, according to central bank Governor Serhiy Arbuzov.

“The recent decline in reserves was caused by foreign-debt repayments, not by Ukraine’s economic situation worsening,” Arbuzov, 36, said July 17 in an e-mailed response to questions from Bloomberg. “The central bank managed to increase reserves at the start of the year by buying foreign currency.”

Ukraine’s economic growth is losing steam as demand for exports such as steel falls amid Europe’s debt crisis, while the government struggles to restart a $15.6 billion bailout program and trim energy costs. Reserves have dropped from $31.8 billion in December as policy makers supported the hryvnia and the IMF forecasts the stash will contract to $24.4 billion by year-end.

Hryvnia, Swaps

The hryvnia plunged 42 percent against the dollar from September 2008 to January 2010, the second-worst performance globally, as the recession triggered by Lehman Brothers Inc.’s collapse cut export demand and investors offloaded emerging- market assets.

The currency, which is down 0.4 percent this year, advanced to 8.0600 as of 2:10 p.m. in the capital, Kiev, from 8.0933 at yesterday’s close, data compiled by Bloomberg show. The yield on Ukraine’s government bonds due 2013 fell to 8.526 percent, the lowest level since May 8.

The cost of insuring government debt against non-payment for five years using credit-default swaps has surged more than 300 basis points in the last year. The swaps traded 16 points lower today at 786.

The IMF cited dwindling reserves among “lingering vulnerabilities” facing Ukraine.

“Gradually increasing exchange-rate flexibility would help mitigate external shocks, strengthen reserves, and preserve competitiveness,” the Washington-based fund’s executive board wrote July 6 in a statement.

‘Artificial’ Peg

The remarks echoed a parliamentary address by President Viktor Yanukovych, who said the central bank should abandon the hryvnia’s “artificial” peg to the dollar and allow the exchange rate to fluctuate within a corridor to help control consumer-price growth.

Arbuzov says they are not in a hurry to change policies at this time.

“Almost-zero inflation gives us no reason to change our exchange-rate policy immediately,” he said. “Still, a gradual move toward a flexible exchange rate is set out in our IMF program, and the central bank will stick to it,” he said, adding such a shift must be “accompanied by a recovery in Ukraine’s financial system.”

Consumer prices fell for a second month in June, dropping 1.2 percent from a year earlier, the state statistics office said July 6. Gross domestic product advanced 2 percent in the first quarter, slowing from 5.4 percent growth in the same period a year earlier, according to the office.

‘Continues Growing’

GDP, which grew 4.4 percent in 2011, advanced 2.5 percent from a year earlier in the first half, Prime Minister Mykola Azarov told a weekly government meeting today.

“Despite the negative effect of the global environment and the recession in the European Union, Ukraine’s economy continues growing,” Azarov said. “Agriculture production rose 7.4 percent and retail sales jumped by 16 percent.”

The central bank cut its benchmark discount rate by a quarter-point to 7.5 percent on March 22, the first reduction in two years. It also reduced reserve requirements for lenders to spur credit growth.

“Should the inflation situation remain favorable and if there’s no risk for the hryvnia’s stability, the central bank will continue with monetary stimulus,” Arbuzov said. “It may be done by cutting rates. The bank may also lower reserve requirements further.”

The central bank allowed lenders to include 10 percent of the nominal value of domestic foreign-currency bonds issued by the government in their required reserves starting June 30, freeing up about 2 billion hryvnia for banks to channel into credit, according to Arbuzov.

To contact the reporter on this story: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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