NBU RESERVES DWINDLE TO US $26-27 BN

The government will be forced to start hryvnia devaluation already in several months

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After alarming statements about the necessity of urgent restructuring of foreign debts last week, the government suddenly changed the course. Several days ago, Deputy Minister for Economic Development and Trade Vadym Kopylov spoke about the intention of postponing repayment to the IMF by 10 years. Now, Ukraine is ready to empty its pockets to immediately satisfy the creditor. "We confirm the intention to stably fulfill the liabilities, including to the International Monetary Fund within the established timeframe," read a statement released recently by the Ministry of Finance. According to the ministry’s preliminary estimates, the condition of state finances and domestic financial market provides a possibility to fulfill the program of borrowings and maintain the level of the state debt of a safe level

Independent economists do not share the optimism of the government officials. According to their estimates, it will be practically impossible to refinance the accumulated debts that require repayment this year. Favorable outcome is possible only in case the cooperation with the IMF is renewed or Ukraine manages to re-sign gas contracts with Moscow. The chances for realization of such scenario, however, remain minimal. "As the parliamentary elections approach, the probability of reviving the credit program of the IMF is dropping substantially. That is why credit ratings of Ukraine will remain under pressure until the government reaches considerable decrease of the cost of import gas by signing a new gas agreement with Russian," says Olena Belan, chief economist at Dragon Capital. The total amount that Kyiv must repay foreign creditors in 2012 exceeds USD 6 bn, taking into account the part of the debt to be paid from the NBU reserves. Payouts to the IMF only this year should amount to US $3.719 bn. The deadline for repayment of repeatedly prolonged credit from Russian VTB amounting to US $2bn is June. In addition, the government must pay US $0.6 bn in Eurobonds. Overall, the expenditures for servicing the state debt amount to almost 25% of the revenues of the state budget this year (UAH 111 bn). The government is hoping that financing of this amount will be ensured through new borrowing with almost half of them attracted at foreign markets as expected. "However, taking into account the cost of 7-year CDS at the level of 770 basis points and changeability of the markets due to the debt crisis in the EU, the plans for currency borrowings seem overly optimistic," claim analysts at Erste Bank. Two weeks ago, first deputy Finance Minister Anatoliy Myarkov-sky announced about postponement to an undetermined period of the emission of US $1.5 bn in Eurobonds, which was earlier planned for March. After Standard & Poor’s reduced the forecast for sovereign credit ratings of the country from "stable" to "negative", Kyiv will have to pay through the nose for new credits. "The market of sovereign Eurobonds of Ukraine already reacted to these events by fall of quotations by 2-2.5 points. Before announcement of decrease of the rating forecast to negative by S&P, the average weighted profitability of five-year sovereign bonds was 8.74%, while after the announcement it grew to 9.11 %. So the new foreign borrowings, if the situation on the market or in Ukraine does not change tor the better, will be more expensive for the government" stated Iryna Pyontkovska, economist at Troyka Dialog Ukraine.

Placement of currency T-bills remains one of the most realistic ways to obtain hard currency. According to some assessments, the population currently possesses around US $60 bn. With that money, the government would easily settle its debts. However, the officials cannot expect to attract such huge funds from the population any time soon. At the moment, according to the NBU, in December 2011 and January-February 2012, the currency T-bill issue volume reached US $700 mn. "It will require some years for citizens to believe in this instrument and start to invest into it. That is why currency T-bills will unlikely harvest any substantial amount from the population and help settle foreign debts," assures Stanislav Dubko, general director of Ukrainian Credit Rating Agency. The banks could show more complaisance in this situation. "If the promotion is done properly, there is a chance that the banks will be more willingly buying these government securities. Since the volume of population currency deposits in the banking sector is currently around US $19 bn, it is a good source for acquiring currency T-bills. The only problem is that these securities are short-term. Already in July this year, the currency T-bills for US $93 mn must be repaid, in September - for US $48 mn, in December - for US $278 mn," tells Oleksandr Okhry-menko, president of Ukrainian Analytical Center. Most likely, the currency debts will be successfully refinanced: the NBU will have sufficient arguments to convince the banks to purchase the new emission of dollar T-bills. Experts, however, still believe NBU, whose reserves are melting even without it, to be the main "sponsor" of the country’s foreign debts repayment. In the second half of last year, the NBU’s currency reserves sunk by 20%. As of March 1, 2012, their volume was US $31,049 bn. Decrease of reserves by another several billion due to repayment of foreign liabilities could have very serious consequences. It is possible that in several months the question of hryvnia devaluation becomes a pressing issue, because there will not be sufficient international reserves to maintain its rate at the same level. "If the government spends US $5-6 bn, the reserves will sink to US $25-26 bn. It will automatically deteriorate the indicator of covering of the money supply with reserves (hryvnia supply issued by the NBU must be fully covered by its reserves). This carries high devaluation risks and increased pressure on the currency market. In addition to that, at the moment the coefficient of import coverage with reserves is 3.5-4 months, while 3 months term is viewed as the minimum acceptable. If the reserves decrease by several billions, there will be serious risks also for the balance of payments," forecasts Vasyl Yurchyshyn, director for economic programs at Razumkov Center. That is why the government will do its best to get the IMF to restructure the loan.