Ukraine Devaluation Bets Still On After Russian Aid PledgeAndras Gergely
Ukraine’s hryvnia stands an even chance of depreciating 11 percent to a record low in a year, even as a $15 billion bailout pledged by Russia this week boosts the government’s ability to avoid default.
There is a 52 percent probability the currency will within 12 months drop beyond 9.29 per dollar, the weakest close set in February 2009, according to derivatives data compiled by Bloomberg yesterday. The probability fell from 84 percent on Dec. 16 as Russia’s bailout plan reduced the cost of insuring Ukraine’s debt against non-payment to a five-month low yesterday.
While Russian President Vladimir Putin’s aid is enough to cover Ukraine’s financing needs through next year, the country is still grappling with a record current account deficit and an economy mired in a third recession since 2008. Foreign-currency reserves dropped to a seven-year low as street protests opposing the government’s ties with Russia roiled Kiev for four weeks.
“The country has few reserves, a high external deficit and weak growth,” Thu Lan Nguyen, a Frankfurt-based currency strategist at Commerzbank AG, said in an e-mail yesterday. There is a “necessity for a weaker hryvnia,” she said.
The hryvnia strengthened 0.1 percent to 8.275 per dollar yesterday after touching a four-year low on Dec. 17. The currency traded at 8.2690 by 11:53 a.m. in Kiev today. Credit-default swaps dropped nine basis points to 799, compared with 1,136 basis points on Dec. 10, data compiled by Bloomberg show.
Derivative traders pared bets on hryvnia depreciation this week by the biggest amount in four years, with non-deliverable forwards showing the currency weakening to 9.58 per dollar in 12 months today, compared with 10.35 seen on Dec. 13.
Russia plans to buy $15 billion of Ukrainian bonds, starting with a $3 billion purchase of two-year notes as soon as this year, Russian Finance Minister Anton Siluanov said on Dec. 17. The probability of the hryvnia plunging to a record during the lifespan of such debt is 87 percent, Bloomberg data show.
Ukraine’s reserves declined 9 percent to $18.8 billion in November, a 51 percent drop over the past two and a half years, stoking concern about the central bank’s ability to continue to buy the hryvnia in the foreign-exchange market.
Prime Minister Mykola Azarov vowed to raise social spending, including the minimum wage, child-care benefits and to increase public paychecks three times before a presidential election expected in March 2015. The pledges raised concern that the bailout will exacerbate the county’s economic tailspin.
Ukraine’s current account deficit, fueled in part by the country’s energy imports from Russia, grew to a record $5.7 billion in the third quarter, central bank data show. Gross domestic product shrank 1.3 percent in the July to September period from a year earlier, the fifth quarter of contraction.
Hryvnia forwards are pricing in too much weakening as the central bank will maintain the currency against the dollar until the election, strategists at Morgan Stanley, including Robert Tancsa, wrote in an e-mailed report yesterday.
That “does not mean we have a rosy picture regarding long-term exchange rate risks,” London-based Tancsa said. The bank sees a “likely renewed threat of devaluation in 2015.”
Ukrainians are staging the biggest street protests in almost a decade after President Viktor Yanukovych rejected a European Union integration accord last month and instead chose deeper ties with Russia, which had opposed the deal.
Opposition politicians, who have fired up demonstrators every night at Independence Square, or Maidan, with speeches, the national anthem and anti-government songs, said they won’t back down until demands they gave the president are met, including freedom for jailed protesters and punishment for instigators of violence.
The turmoil may lead households to convert more of their savings as a “hedge against political instability” ahead of the 2015 elections, Yevgeniy Orudzhev, a Kiev-based analyst at BNP Paribas SA, wrote in an e-mailed report Dec. 18.
The yield on Ukraine’s dollar bonds due 2023 increased 22 basis points to 9.16 percent yesterday, showing growing concern over the junk-rated sovereign’s ability to sustain its financing. The rate on the country’s nearest maturity dollar notes, due in June 2014, dropped 75 basis points to 8.47 percent.
“The support from Russia has lowered Ukraine’s short-term default risk,” Arjen van Dijkhuizen, an Amsterdam-based economist at ABN Amro Group NV, wrote in an e-mailed report yesterday. “The longer-term impact on creditworthiness is less clear so far,” van Dijkhuizen wrote. “Moreover, the deal with Russia might trigger further political turmoil,” he said.