Ukraine's IMF aid of­fers no panacea for cur­rency

The Pak Banker - - COMPANIES/BOSS -

Meet­ing the con­di­tions of an In­ter­na­tional Mon­e­tary Fund bailout will likely fail to of­fer much re­lief for Ukraine's be­lea­guered cur­rency, which has de­pre­ci­ated about 61 per­cent since the be­gin­ning of last year.

That's the con­clu­sion of firms from Cit­i­group Inc to Com­merzbank AG, which pre­dict the hryv­nia will likely tum­ble as the east Euro­pean na­tion eases cap­i­tal con­trols un­der the terms of the IMF ac­cord. Ukraine of­fi­cials say that's next on their agenda af­ter they se­cure an agree­ment on a $19 bil­lion in­ter­na­tional debt restruc­tur­ing. The Na­tional Bank of Ukraine im­ple­mented the con­trols af­ter the hryv­nia dropped to a record 34.247 per dol­lar in Fe­bru­ary as Rus­sian-backed sep­a­ratists seized much of the coun­try's in­dus­trial heart­land. The cur­rency has since sta­bi­lized, which strate­gists said may only ex­ac­er­bate the drop once the re­stric­tions are lifted.

There's "bot­tled-up pres­sure" in the hryv­nia, said Ivan Tchakarov, an economist at Cit­i­group in Moscow, who sees it fall­ing to 25 to 26 per dol­lar by year-end, from about 22 now. "Given the moves we've seen, a 10-15 per­cent de­pre­ci­a­tion af­ter con­trols are lifted" wouldn't be a sur­prise, he said.

The curbs in­clude lim­its to for­eign-cur­rency pur­chases and de­posit with­drawals. The cen­tral bank set an of­fi­cial rate of 22.09 for Wed­nes­day. Such mea­sures helped the hryv­nia trim its yearto-date loss to 28 per­cent and re­lin­quish its sta­tus as this year's worst-per­form­ing cur­rency to Be­larus's ru­ble, which is down 33 per­cent.

Ukraine could do with­out fur­ther cur­rency declines. In­fla­tion has al­ready climbed above 50 per­cent, which in turn con­trib­uted to eco­nomic out­put shrink­ing by a quar­ter since the end of 2013, just be­fore Rus­sia's an­nex­a­tion of Crimea and for­mer Pres­i­dent Vik­tor Yanukovych's ouster.

Re­mov­ing cap­i­tal con­trols is dan­ger­ous for the cen­tral bank be­cause it can no longer rely on us­ing its for­eign-ex­change re­serves to prop up the hryv­nia, said Danske Bank A/S strate­gist Vladimir Mik­la­shevsky. While the trad­ing re­stric­tions have helped Ukraine start to bol­ster its hold­ings, they're still down more than 70 per­cent in the past four years.

"Fun­da­men­tals are ex­tremely weak," Mik­la­shevsky said from Helsinki, pre­dict­ing the hryv­nia will weaken to 33 per dol­lar by year-end. "For­eign-cur­rency re­serves are too scarce to sup­port the cur­rency if cap­i­tal con­trols are lifted." Pres­sure is grow­ing for coun­tries across the de­vel­op­ing world to let their man­aged ex­change rates de­pre­ci­ate, par­tic­u­larly af­ter China de­val­ued the yuan last week. Kaza­khstan al­lowed the tenge to drop the most in 18 months on Wed­nes­day, while Viet­nam marked down the dong for the third time this year.

The IMF pre­dicts the hryv­nia will end the year at 23.5 to the dol­lar. Its bailout, plus sav­ings from the debt restruc­tur­ing and loans from the Euro­pean Union and other na­tions, will be worth about $40 bil­lion to Ukraine. That's money the coun­try needs to re­build its rav­aged econ­omy and in­fra­struc­ture. The econ­omy has shrunk 28 per­cent since De­cem­ber 2013 to $132 bil­lion, while con­sumer prices surged 55 per­cent in July from a year ear­lier, the big­gest in­crease in the world af­ter Venezuela's 68.5 per­cent.

It isn't cer­tain Ukraine will meet the con­di­tions for the IMF aid. Talks in Cal­i­for­nia on the debt restruc­tur­ing failed to yield an agree­ment last week.

And while cen­tral-bank Gover­nor Valeriya Gontareva has said she'll grad­u­ally lift the main cur­rency re­stric­tions by April, Com­merzbank ar­gues it won't be easy for the author­i­ties to let the hryv­nia go.

"It's pretty hard to lift cap­i­tal con­trols grad­u­ally: there are cer­tain mea­sures you ei­ther have or don't have," said Lutz Kar­powitz, a se­nior strate­gist at Com­merzbank in Frank­furt. "If they end some of the im­por­tant ones, there may be a drop" in the cur­rency "of as much as 20 per­cent."

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