Ukraine Devaluation Angst Mounts as Yanukovych Secures Win
Banks in Ukraine’s capital didn’t have enough dollars to convert Oleksandra Ratushnyak’s hryvnia savings this week so she spent the rest to offload a currency investors bet will slide after the ruling party won re-election.
“Nobody trusts the hryvnia,” Ratushnyak, a 29-year-old lawyer, said Oct. 29 in Kiev after buying $1,750 from three banks and being told four more had run out. “The exchange rate has been manipulated and no one knows how much it’s worth.”
President Viktor Yanukovych’s victory in Oct. 28 parliamentary elections divided investors and citizens in a nation where payments from bank loans to apartment rents are often made in dollars. While international bonds advanced on optimism devaluation will improve the balance of payments as the economy skids toward recession, citizens may be concerned about the value of their savings.
Dollar purchases by Ukrainians anticipating a weaker currency after the ballot were the highest in a year in September, official data showed, while the local units of UniCredit SpA (UCG) and OTP Bank Nyrt. reported increased demand for the greenback. The central bank has dipped into its reserves to defend the hryvnia, contributing to an almost $9 billion drop in the stash to $29.2 billion since August 2011.
Ukrainians are again becoming concerned about their currency, four years after the hryvnia lost more than half of its value following the collapse of Lehman Brothers Inc.’s in 2008. Economic output plummeted 7.8 percent and consumer prices surged 22.3 percent that year. The contraction continued at a 6.7 percent pace in 2009.
The currency, which has lost 2.2 percent this year, will retreat to 9.4 per dollar in six months’ time and 10.42 in a year, according to non-deliverable forwards, which in June predicted declines to 9.04 and 10.22. It was down 0.2 percent at 8.1964 at 12:19 p.m. in Kiev, data compiled by Bloomberg showed.
“Hryvnia stability is perceived as a political achievement on the part of the Ukrainian electorate,” Alexander Morozov, a Moscow-based economist at HSBC Holdings Plc (HSBA), wrote Oct. 22 in a note. After the election, “Ukrainian authorities’ hands may be untied and they may permit the hryvnia to devalue.”
After expanding 5.2 percent last year, Ukraine’s economy contracted 1.2 percent in the third quarter from previous three months as Europe’s debt crisis damped demand for steel, the country’s main export earner. Erste Group Bank (EBS) AG and HSBC predict a second-half recession.
The current-account deficit almost doubled through August to $8.6 billion as Russian natural gas prices rose. The gap will widen to 9 percent of gross domestic product in 2012, according to Morozov, who said a hryvnia rate of 11 per dollar is needed by end-2013 to narrow the shortfall to 5 percent.
Investors and traders have been betting central bank support for the hryvnia will dwindle, helping stabilize the balance of payments, restore competitiveness and boost exports.
The government may also unfreeze a $15.4 billion loan from the International Monetary Fund, halted last year after Ukraine refused to raise household energy tariffs, Ronald Schneider, who helps manage 700 million euros ($910 million) in emerging-market debt for Raiffeisen Kapitalanlage GmbH in Vienna, said Oct. 22 by phone.
The Washington-based lender has urged a more flexible exchange rate for the hryvnia.
Ukraine’s dollar Eurobond due 2017 climbed today, cutting the yield to 6.72 percent, the lowest level since it was sold in July. Credit-default swaps, which narrowed for four sessions, dropped 101 basis points last month to 605, reflecting an improved perception of risk.
Citizens stepped up dollar purchases as devaluation speculation intensified in a country where about half of outstanding retail loans are denominated in foreign currencies. They bought $2.9 billion in September, double February’s amount, central bank data showed.
“Because of increasing demand for foreign currency, a temporary limit of $1,000 per client per day has been set,” the local unit of Budapest-based OTP’s press office said Oct. 30 in an e-mailed statement.
Heightened demand has led to a “difficult but manageable” situation in Ukraine, according to Sergiy Manokha, director of treasury and institutional business at UniCredit’s local unit.
“The main positive thing is that they’re not removing deposits as they were in 2008,” he said Oct. 30 by phone.
The authorities may only opt for a devaluation to 8.3 per dollar by year-end and 9 by end-2013, according to Alexander Valchyshen, head of research at Investment Capital Ukraine, who said the drop would increase repayment costs on foreign bonds, push public debt to 35 percent of GDP from 28 percent and widen the budget deficit by weighing on economic growth.
“The fiscal costs of the devaluation will be sizable,” he said Oct. 30 by phone from Kiev. “The deterioration in the fiscal position is the main reason the authorities will try to resist market forces.”
Ukraine’s central bank and government have “all resources” to keep the hryvnia stable after the elections, Prime Minister Mykola Azarov said Oct. 10.
Policy makers are also seeking to deter people from buying foreign currencies as a hedge against devaluation risks, central bank Governor Serhiy Arbuzov said last month.
Ukrainians aren’t convinced the hryvnia can hold its ground and neither are investors.
“The elections are behind us and forwards show the market expects some devaluation,” said Steffen Gruschka, portfolio manager at fund SG Alpha, which manages $10 million of Ukrainian equities. “The question is now how it will happen and when.”
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