Ukraine’s monetary authorities can manage a steady hryvnia landing in 2013, but they should not let international reserves fall below the psychological barrier of $20 billion, reads a recent report by Kyiv-based investment bank Concorde Capital.
A smooth currency descent will depend on renewed cooperation with the International Monetary Fund, managing spikes in people’s demand for dollars, and starting a controlled devaluation as quickly as possible, moving to a rate of around Hr 8.3 per dollar by April, and 8.8 by year’s end.
The report also issues a warning on the consequences of inaction: “Failure in at least two of the three areas could take the foreign exchange market out of National Bank of Ukraine’s control already in spring 2013.”
Over the past year, the NBU kept the hryvnia strongly pegged to the dollar, paying a heavy price in international reserves. These fell by an astounding 23 percent in the course of 2012, dropping $7.3 billion to a year-end result of $24.5 billion.
Conventional wisdom dictated that this was tied to the Oct. 28 parliamentary elections, as the population would not take kindly to a fall in dollar-denominated earnings and would punish the ruling Party of Regions at the ballot. Since then, however, no major change in policy has appeared.
And this despite the fact that President Viktor Yanukovych loyalist Serhiy Arbuzov, the former central bank head and potential candidate for prime minister, was promoted to deputy prime minister and could thus be absolved of blame.
The nomination on Jan. 10 of Ihor Sorkin, the previous deputy NBU governor and Arbuzov’s right-hand man, as central bank chief is seen as a sign the previous policies will continue.
“The NBU’s policy will not change if Sorkin is approved NBU governor. I think that this is the main sense for the appointment,” deputy board chairman of Prominvestbank Viacheslav Yutkin told news agency Interfax-Ukraine.
But that’s just not going to cut it in 2013, argue analysts at Concorde Capital. In the absence of wider policy adjustment, the Ukrainian public demand for dollars could drive reserves past the psychological barrier of $20 billion, or the even more critical one of $18 billion, the equivalent of two months of imports.
So far the bank has managed to cool demand for hard currency through administrative measures, notably threatening to introduce a 10 percent tax on the sale of foreign currency. But this won’t work forever.
“(The) NBU has limited time to use this scarecrow for control of retail dollar demand,” the Concorde Capital analysts warn. “In 1-2 months, it will simply stop working and the NBU will have to invent another demand-limiting measure.”
Conversely, managed devaluation would help reduce the current account deficit, boost imports and reduce expectations of sharper falls in the hyrvnia’s value to come. “Moreover, devaluation could allow rating agencies to upgrade Ukraine’s profile, while failure to do so will surely cause a downgrade,” the report cautions.
It should also have a positive impact on talks with the IMF, which experts say will make or break Ukraine’s economy this year. A flexible currency regime has long been a major condition for resumed lending.
Ukraine in 2012 paid a record $3.7 billion to the international lender, a sum set to grow to $5.8 billion this year. But tapping capital markets will prove difficult and costly: the recent, relatively cheaper Eurobond issues were largely based on expectations of an IMF deal after the elections. Without such prospects, borrowing abroad could be prohibitively expensive.
This makes a deal all the more urgent, with particularly critical dates to watch being Feb. 12 and April 30 – the deadlines for the payment of two out of the four $1.3 billion tranches due.
A further IMF condition is the unpopular move of raising gas prices for households, ending therefore a de facto state subsidy. Like devaluation this will be politically costly, and should thus be done as quickly before the 2015 presidential elections, analysts say.
In more ways than one, it’s now or never.
Kyiv Post editor Jakub Parusinski can be reached at [email protected]
