Ukraine's IMF aid offers no panacea for currency
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."