Ukraine's international currency reserves continued on their downward trend in November, falling a significant 5.4 percent monthly to $25.4 billion. According to Dragon Capital investment bank, that's only enough to cover 2.9 months of Ukraine's imports – the lowest level since May 2003.
A rule
of thumb widely used by economists, the
three-month import cover signals that countries have enough foreign
currency reserves to keep their foreign trade operations running
smoothly even in the case of minor shocks.
So far, the only economy in the region
to fall below that level is Belarus at around two, with Poland
boasting close to seven months import cover while Russia’s massive
sovereign wealth fund puts it at an impressive 527. (The U.S., whose
currency is widely used in international trade and as reserves, can
get away with less than three months).
As a result, falling below this
threshold for Ukraine should set the warning lights flashing.
And flashing they are. Over the past
week Moody’s and Standard & Poors, two of the top three
international rating agencies, both downgraded Ukraine’s sovereign
rating with negative perspective.
Moody’s deplored a “deterioration
in the country’s institutional strength, against the backdrop of poor
policy predictability as well as reduced data transparency.”
Still, the flight of capital has
decreased somewhat from $2.2 billion in October to $1.5 billion this
month, according to Dragon Capital. Pressure on the hryvnia fell
following administrative
measures like the 50 percent export earnings
surrender requirement, and a potential upcoming 10 percent tax on
selling foreign currency.
“However,
there has been no major change to the fundamental factors
underpinning foreign exchange pressure,” Dragon Capital chief
economist Olena Bilan wrote in a note to investors.
“The continuous decline in NBU
reserves, coupled with protracted political uncertainty and the lack
of clear signals concerning talks with the IMF will keep depreciation
expectations strong internally and externally.”
The investment bank currently estimates
8.4 hyrvnia per dollar by the end of 2012 and 8.8 by the end of 2013,
up from the current 8.2, although other studies have put the figure
for next year’s end as high as 10 hyrvnia per dollar.
This makes Ukraine’s macroeconomic
position all the more worrying. The country is facing a large current
account deficit of around 8 percent and around $10 billion in
external debt redemptions, the biggest chunk of which should go to
the International Monetary Fund.
The fund delayed
a planned visit to Kyiv on Dec. 7 after
Ukraine’s government officially resigned. Whether Ukraine manages to
seal a new loan agreement depends the politically diffiult decisions
to liberalize the exchange rate and increase gas prices for
households. However, Ukrainian Prime Minister Mykola Azarov, who was
renominated on Dec. 10, has repeatedly vowed not to increase gas
prices. Government officials have previously put the date for
currency regime liberalization at end-2013.
A recent Eurobond of $1.25 billion at a
relatively low rate of 7.8 percent – issued amid growing risk
appetite for the high yields on emerging market debt – brought
optimism for the economy in general as well as corporate issuers for
whom this would constitute a benchmark. It even fueled
speculation that a further, even larger, debt
issue could follow.
This now seems more difficult, however,
as a series of negative headlines are likely to make any new offers
more expensive. It has also impacted corporate issuers – metals and
mining giant Metinvest was similarly downgraded by Moody’s on Dec. 7.
Meanwhile, the banking
sector is ailing as hyrvnia deposits remain
low, despite a slight uptick in November, which saw a 0.5 percent
rise in overall deposits. The problem is that this was mainly driven
by unsustainably high rates – 20.53 percent on average, according
to international investment bank Troika Dialog.
Moreover, this comes amid Ukraine’s
first ever month of deflation, which means real rates are even
higher.
“Despite the instability on the
Ukrainian money market and fears of devaluation, the Ukrainian
banking system saw a surprising inflow of deposits. However, this was
mainly driven by unsustainable interest rates offered by banks made
desperate from the lack of hryvnia liquidity on the interbank market,
which reached an absolute low in November,” Troika analyst Yevhen
Hrebeniuk wrote to investors.
