Save private hryvnia

It is becoming increasingly difficult for the NBU to prevent the national currency from drastic devaluation

No more borrowings

International borrowing markets have shut their doors to Ukraine. Last weekend, Moody’s rating agency reduced the rating of Ukraine’s government bonds from B3 (highly risky) to Caal (liabilities of low quality with an extremely high share of risks) with the possibility of further reduction, i.e. to the pre-default level. "Earlier the market ignored the reduction of Ukraine’s ratings. This time, however, Moody’s decision incited the negative reaction of foreign investors and led to a decrease in the value of Ukrainian Eurobonds. Their profitability dropped below the 10% line," Olena Bilan of Dragon Capital says. Now it will be extremely expensive and difficult for Ukraine’s government to place Eurobonds. "If Ukraine takes out a loan over 10% per annum, this will be a sign of a desperate situation in the country. Such a step will lead to further revision of its ratings and an increase in the cost of borrowings," says Executive Director at CASE Ukraine Dmytro Boyarchuk. The lowering of Ukraine’s rating is a result of analysts’ fears about the sufficiency of NBU reserves. Moody’s believe that the country’s gold and currency reserves will be melting due to an increase in demand of the population for hard currency and the obligation of the government to repay foreign debts by the end of 2014. The trade war with Russia and the suspended talks the IMF will be additional risk factors. The syndicated loan of US $750 mn, which the Finance Ministiy attracted this month from several banks (including Russia’s Sberbank), will not suffice for long. The government will be able to use it to settle accounts with the IMF and repay the outstanding debt for 2013. Nevertheless, Ukraine’s main financial institution will still have to pay USDS500 mn in principal on hard currency T-bills and USD 300 mn in interest payments. The NBU will have to pay another USD 800 mn to the IMF from its gold and hard currency reserves. "If the situation on foreign markets does not improve, the authorities will have to rely on domestic sources, in particular currency reserves of the banking system or bilateral and syndicated loans." says Belan.

Where will the NBU get currency?

The prospects of the national currency thus look pretty grim. Nervousness on the currency market, which continued since the start of September, clearly showed the weakness of the hryvnia. Last week, dollar quotations on the interbank exchange reached their maximum level since last November - UAH 8.20-8.205/USD. Only thanks to the NBU’s interventions and the active sale of dollars by state banks did the exchange rate manage to roll back to UAH 8.187-8.19 by the end of the week. Be that as it may, this devaluation of the hryvnia is unlikely to be the last one. According to expert forecasts, by the end of the year the rate of the national currency may sink to UAH 8.30-8.50 and even lower. In order to avoid that, the NBU rashly began issuing regulatory acts aimed at reducing the level of the economy’s dollarization. The main objective is to reduce the interest of the population in dollars and the forced transition of settlements of average citizens into national currency. On September 1, the NBU resolution No. 365 took force obligating commercial banks to convert the currency that private individuals transfer to each other’s accounts within the country into hryvnia. The only exception will be operations for which interest on current and savings accounts is charged, inheritance of hard currency or receiving it through as a gratuity deed and the transfer of hard currency by a private individual from one personal account to another. According to the assessments of bankers, this measure will soon allow to increase supply of currency on the interbank exchange, slightly easing the pressure on the hryvnia rate. "This document will additionally limit the possibilities of swindlers, who thanks to loopholes in the legislation managed to transfer money abroad. Up until now they could only transfer currency to their accounts abroad via private individuals - non-residents. Now they no longer have that option," Executive Director of the Independent Banking Association of Ukraine Serhiy Mamedov pointed out. In addition, the NBU worked on lowering the attractiveness of savings in hard currency. Starting from September 30, the standards of commercial bank reserves on long-term deposits of companies and citizens in foreign currency will be increased 1.4 times from 5% to 7%. The need to reserve a larger volume of funds for attracting hard currency will force bankers to revise interest rates on currency deposits. According to the forecasts of bankers, starting from October these rates will drop by 0.3-0.5%. This, in turn, will force depositors to switch to hryvnia more actively, reduce the demand for foreign currency and lead to a slowdown in hard currency lending. In addition to that, toughening of reserving norms will reduce the liquidity of the banking system by UAH 2-3 bn, thereby reducing the appetites of profiteers that purchase non-cash currency. The NBU has also actively worked on patching up the gaps by allowing the withdrawal of currency from the country though the pseudo-import mechanism. Starting from September 16 (Resolution No. 364), commercial banks will be more closely tracing "import without import" operations for the purchased of a commodity from a non-resident with the objective of further sale or use for personal needs abroad. According to the assessments of the government, around USD 10 bn was withdrawn from the country under the pretense of payment for a commodity that was not imported into the territory of Ukraine in 2012. Now it will be impossible to do so without connections with the tax authorities: bankers will lift control over such operations only after the funds are transferred to the company’s account from the sale of such a commodity or its use. Otherwise, the tax authorities will be notified and will pass down the final verdict on the legality of supply of commodities that were not imported. Nonetheless, the current measures of Ukraine’s central bank will not be sufficient to stop a further decrease in gold and currency reserves. "We believe that by the end of the year they will be at USD 19-20 bn," says Chief of the Analysis and Studies Department at Raiffeisen Bank Aval Dmytro Solohub.

This means that without attraction of funds from foreign creditors the NBU’s possibilities to support the value of the hryvnia will be limited. "The central bank is currently taking precautionary measures if the economic situation in the country deteriorates and the IMF does not issue the next loan. It is possible that the regulator’s actions will smoothen out sharp leaps in the exchange rate, but this will not protect the hryvnia from further weakening," says Vladyslav Antonov, an analyst at the Alpari Company. He believes that if the Ukrainian government fails to receive a new loan tranche from the IMP, the rate of the national currency may sink to UAH 8.80-9.00/US $1 by the end of the year.