December 9, 2013As the charts here show, Ukraine’s hard currency reserves have fallen so dramatically that the national currency, the hryvnia, is now hanging in the air like a cartoon character that ran off a cliff, but hasn’t yet noticed it is supposed to fall.And things are about to get worse. As the demonstrations in Kyiv and other cities go into their second week, the population has started buying up dollars in anticipation of a devaluation. The hryvnia/dollar rate has already slipped from UAH8.14/USD1 to UAH8.29/USD1 and there are reports that the banks (hotly denied by them) have started to limit the availability of the dollar. A crash looks very close.
Ukraine badly needs several billion dollars – and very soon. Ukrainian President Viktor Yanukovych was in Moscow on December 6, reportedly asking for a $12bn loan to tide the country over. If this or money from any other sources like the International Monetary Fund is not forthcoming, then the currency’s slide could start as soon as this week and be shortly followed by runs on the banks.
Below is a research note from UkrSibbank, owned by BNP Paribas Group, on this subject:
USD/UAH hit the downward path, reaching UAH 8.29 [last week]. According to our expectations (see our latest Capital Markets Weekly), the demand for FX rose sharply [last week], while sellers seem to have cut supply of FX. NDF rates for Ukrainian currency soared following the spot rate, now showing 9.14/9.39 for the 6M tenor.
Authorities seem to finally agree to a slow depreciation. In Sep-Nov 2013 UAH already lowered from around 8.14 to 8.23 per USD. At the same time, in a bid to smooth down the UAH/USD fluctuations, state-owned banks have continuously stepped in to boost the national currency (while NBU generally prefers to stay aside).
However, as pressure on the UAH has become larger, NBU entered the market twice within the last four days (see table below).
Large-scale support from Russia appears increasingly distant. Until recently markets had been betting on some considerable concessions from Russia in exchange for Ukraine’s nonsigning of the association deal with the EU. Now it becomes evident that Russia has taken a tough position towards Ukraine, being in no rush to back up its ailing neighbor.
Taken into account the scale of the recent pre-EU demonstrations, it appears that a possibility of considerable improvement of Russia-Ukraine relations has become lower. Continuous “tossing” of the government between West and East do not reassure the market either.
Meanwhile, Ukraine is too short of time for further haggling. Next year total annual FX payments (incl. Naftogaz Eurobonds) stand at around USD 9.2bn, raising questions about Ukraine’s ability to meet its FX debt obligations. While no data on the NBU reserves in November has been published yet, they are very likely to land below the psychologically important level of USD 20bn.
2Q and 3Q 2014 and afterwards are critical. While December and 1Q 2014 FX debt payments look moderate (USD 1.7bn in total), later periods look much more threatening. 2Q 2014 FX debt payments are estimated at 2.8bn, implicitly complemented by Ukraine’s huge debt for Russian gas (which payment Ukrainian side seeks to postpone till spring 2014).
Retail demand for FX expected to spike. Until now net retail demand for FX had been moderate. However, in the light of the recent events, population will likely show increased demand for USD, which can easily reach USD 2-3bn this month, exerting further pressure on FX reserves. It is important that at the end of October, NBU FX reserves covered only 70% of total UAH retail deposits (standing at USD 30.4bn as of November 1).
If the population rush to convert their UAH holdings into FX, it will therefore be very difficult for the NBU to keep the UAH/USD stable. In this case, the regulator will have to resort to non-trivial steps to prevent the local currency from plummeting.