Ukraine Foreign Reserves Decline, Raising Hryvnia Concern

Ukraine’s international reserves fell last month, raising concerns that the central bank will face difficulties managing the hryvnia.

Reserves fell to $34.95 billion from $38.2 billion a month earlier, the Natsionalnyi Bank Ukrainy, based in the capital Kiev, said today in astatement on its website. The NBU spent about $1.1 billion last month to satisfy increasing public demand for foreign currency, according to Olena Bilan, chief economist at Kiev-based Dragon Capital.

“This figure causes concern because it means the NBU has less capacity to withstand hryvnia devaluation pressure in the future,” she said in a telephone interview today. The currency has lost 0.4 percent against the dollar in the past six months. It gained 0.1 percent to 8.0011 today.

The central bank controls the exchange rate by buying and selling dollars on the interbank market. Ukraine’s $15.6 billion stand-by program with International Monetary Fund has been on hold since March after the country received $3.4 billion. The Washington-based lender froze payments over the government’s failure to raise natural-gas rates for households.

The IMF delayed a visit scheduled for August to late this month. Ukraine, which said last month it would seek to sell $2.5 billion in Eurobonds before year-end, needs the funds because Europe’s debt crisis is roiling financial markets, Deputy Prime Minister Serhiy Tigipko said on Sept. 26.

Under Pressure Unless IMF financing is secured, the hryvnia will be under pressure, Tim Ash, head of emerging-market research at Royal Bank of Scotland Group Plc in London, wrote in an e-mailed note to client today.

“The NBU is likely to be forced to allow the currency to weaken,” Ash said adding that the hryvnia may trade at 9 to 10 hryvnia per a dollar by year-end.

The Ukrainian government started selling domestic bonds linked to the hryvnia’s rate against the dollar this week. It raised 861 million hryvnia ($107.7 million) on Oct. 4. The Finance Ministryannounced an unscheduled auction for dollar- nominated treasury bills today.

“Ukraine’s fundamental credit profile has undoubtedly become more challenging over the past months without the prospects of near-term IMF financing and in light of a challenging global economic backdrop,” Andreas Kolbe and Koon Chow, analysts at Barclays Capital, said in an e-mailed statement late yesterday. “Its reserves and debt-redemption profile make a near-term debt default very unlikely.”

Ukraine’s credit-default swaps fell 13 basis points to 933 basis points today, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.