Conditions unclear as IMF grants Ukraine $16.5bn stand-by loan

Graham Stack for business new europe (www.businessneweurope.eu)
The IMF announced on Sunday October 26 it would grant Ukraine a SDR 11bn ($16.5bn) stand-by loan, conditional on Ukraine passing a raft of stabilisation measures the details of which are not known. The move follows last week’s massive intervention by the National Bank of Ukraine (NBU) to support the hryvnia.

The Bank had to intervene with a massive sale of its international reserves in October as devaluation pressure mounted on the hryvnia. Plummeting steel prices, external debt repayments and a sharp rise in retail demand for cash foreign currency, caused NBU reserves to drop by $3.2bn over the first 20 days of October (down 8.6%), to $34.3bn.

The intervention could not prevent the hryvnia weakening by 19% since the beginning of the month, to UAH 6.03:USD on October 24, according to Bloomberg.

The loan amounts to about just under 50% of NBU international reserves as of Oct. 21, and is larger than envisaged by Ukraine authorities, who spoke of $10-15bn as likely amount.

There are still no detail of the legislative measures Ukraine has agreed to, and which Ukraine’s fractured parliament will be confronted with tomorrow. The IMF said in a press release the program would address “financial sector liquidity and solvency problems by smoothing the adjustment to large external shocks and by reducing inflation. At the same time, it will guard against a deep output decline by insulating household and corporations to the extent possible.”

According to Galt & Taggart’s Danylo Spolsky, Ukraine’s central bank governor Volodymyr Stelmakh noted that besides changes to banking legislations, the package will focus on measures to rein in the current account deficit. The deficit is expected to widen as metallurgy, the leading exporting sector, contracts.

Troika’s Iryna_Piontkivska also expects the IMF to make conventional requirements such as tightening of fiscal policy and privatisation.

Most analysts believe the loan – given approval by the IMF board and Ukraine’s fulfilling all conditions – should suffice to prop up the hryvnia

According to Alfa’s Andriy Gubachov, “should Ukraine obtain the loan, it would completely remove all current pressure on the currency and ease speculative demand for foreign currency.”

Dragon’s Olena Bilan is less optimistic, expecting the hryvnia “to remain under strong devaluation pressure until end-2008 and for most of 2009. Although Ukraine’s C/A deficit, expected at $15bn this year, 8% of estimated 2008 GDP, may narrow in 2009 due to contracting domestic demand, an estimated $30bn of external debt, which we think is unlikely to be rolled over and will have to be repaid next year, is set to weigh on the hryvnia,” says Bilan.

However, she adds that she expects “thanks to the IMF backing, the NBU will have enough resources to help private companies and commercial banks meet their foreign obligations falling due in the next 12 months.”

An additional unknown is the coming price hike for natural gas imported from Russia. Ukraine has been delaying settling the price until the end of the year, as world oil prices are falling.

According to Troika analysts, “the recent sharp correction in oil prices, to which gas prices are expected to react with a typical lag of six to nine months, may enable Ukraine to negotiate a gas price below $300/tcm, i.e. our current base-case estimate.” Ukraine currently pays $175 / tcm, so this would have a major negative impact on Ukraine’s current account deficit.

Today, the dollar and euro exchange rate continued to grow relative to the hryvnia, reaching UAH6.00-6.23 at some currency exchange booths, according to Korrespondent.net.

This is the lowest level since Ukraine adopted the hryvnia in 1996.

Ukraine could be facing financial meltdown

Graham Stack for business new europe (www.businessneweurope.eu)

With the hryvnia depreciating rapidly due to a soaring trade deficit, and banks downgraded across the board, the International Monetary Fund is in town to bail out Ukraine. But only if its politicians finally get their act together.

On Wednesday, October 22, the hryvnia fell on the interbank market from $5.45-$5.55 to $5.7-5.75 at close of trading, a drop of 4.3% on the day. At some exchange points, dollars were being sold for UAH6. This, despite National Bank of Ukraine (NBU) intervention that has seen reserves fall $3.2bn in October to $34.3bn, the NBU head Vladimir Stelmak said. $34.3bn covers three months imports.

UkrSib analyst Evgeniya Afonina said that the dollar was expected to rise to UAH6 on the interbank market Thursday, meaning the hryvnia will have depreciated by one-third since reaching its peak of UAH4.5 per dollar in June this year.

The hryvnia’s difficulties are due to a trade deficit that has widened hugely in the second half of 2008 as Ukraine’s key steel sector was hard hit by the collapse in world prices. Exporters have few dollars to sell, and importers are desperate for dollars at any price to keep up payments on credits.

Demand for dollars is also increasingly coming from the population transferring their savings into hard currency as their hryvnia deposits mature. NBU’s Stelmak said today that individuals had withdrawn UAH 13.5bn in the course of October.

The NBU has now imposed a ban on preterm redemptions, which will cover the lion’s share of savings account. Analysts are calling for the ban to be extended to all deposit withdrawals. “If narrow money continues to explode via deposit withdrawals, the NBU may have difficulties since it would need to kill excessive supply by one hand and provide refinancing to ailing banks by another, virtually printing UAH,” wrote UkrSib analysts.

UkrSib’s Afonina emphasizes that the situation in the country was still “quite civilized,” with no long queues in front of banks or exchange booths. However internet forums are full of semi-hysterical premonitions of a looming meltdown.

It’s not just punters who are getting edgy. Anders Aslund, a sometime advisor to Russian and Ukrainian reformers, circulated a note Wednesday calling for an immediate disbursal of an IMF rescue package to Ukraine. “Speed is vital,” wrote Aslund. “Everyday, Ukrainian companies fall off the financial cliff for no good reason. Their only fault is that they have taken a foreign loan. The slightest delay in an IMF agreement can lead to a run on the Ukrainian currency, the collapse of the Ukrainian bank system, mass bankruptcies, a double-digit fall in output, mass unemployment, and undoubtedly political unrest.”

Storm clouds

The clouds have been gathering since mid-October. Yields on Ukraine’s Eurobonds have shot up to 20%, a level characteristic of countries in external default.

On Friday, October 17, Standard & Poor’s put Ukraine’s foreign and domestic currency ratings on a global and domestic scale on CreditWatch with a ‘Negative Outlook’. S&P cited Ukraine’s high level of private foreign currency debt against the background of currency instability, depreciation of the financial sector’s asset quality and a reversal of the country’s international trade flow. This was followed by Moody’s and Fitch downgrading 10 Ukrainian banks, making it hard for them to roll over short-term debt.

Now the fall in the hryvnia is going to add further pressure on companies with payment due on foreign debts. Ukraine has only $15bn public foreign debt. However, it had $85bn private foreign debt as of July 1, making gross external debt around 50% of GDP. Citibank analysts estimate Ukraine’s 2009 external financing requirement at $55-66bn, of which $32bn-40bn is in the private sector. Most worryingly, the NBU has said it expects banking sector debt worth $1bn-1.2bn to mature in the final quarter of this year.

There are some straws to clutch at. For instance, 25% of short-term banking debt is owed to the big foreign parent banks that own 40% of banking assets. And in the first two weeks of October, there was a sharp drop in imports, as banks froze retail lending and the falling hryvnia raised prices.

On the other hand, all this is taking place against a homemade backdrop of political crisis and personal feuding on an operatic scale. Preterm elections were called for December 7, postponed to December 14, then to January and then apparently cancelled. All in the course of a week. Then on Thursday, President Viktor Yushchenko said the elections could take place on December 7 after all. His prime minister, Yulia Tymoshenko, bitterly opposed to the elections, is refusing to pass anti-crisis laws she suspects contain hidden measures for funding them.

And looming on the horizon is a major gas price hike from Russia come the new year. As yet nobody knows how large. Worst-case scenarios say the hike could be from the current $175 per 1000 cubic meters to $400, which would really sink the hryvnia.

Steel – Ukraine’s Achilles’ Heel

The root of Ukraine’s problems – in the context of the global financial meltdown – is the collapse in world steel demand and prices. The Industry Ministry earlier in October officially declared the crucial metallurgical sector to be in crisis, with 17 of 36 steelmaking furnaces out of play, as steel prices have fallen by half.

Steel is for Ukraine what oil and gas are for Russia, accounting for 27% of GDP and 39.9% of the export revenues. But there is an important difference: over years of soaring oil and gas prices, Russia has cannily channelled much of the revenues into rainy day stabilization funds it can draw on now; Ukraine has no such “air bag” to cushion the blow.

A further crucial difference is that the oil price will get political support from Opec to break its fall. Obviously there is no such safety net for steel – and due to the soaring prices all last year right up to a few months ago, there is now surplus capacity in the world. This leaves Ukraine looking horribly exposed to the plummeting steel prices. The current account deficit, which in 2007 amounted to 4.2% and was easily covered by FDI, is set to widen to $21.3bn, 11.1% of estimated 2008 GDP, according to Dragon analysts. And this is before any gas price hike kicks in.

IMF to the rescue

Most analysts are still hopeful that the IMF rescue packet being negotiated now in Kyiv could still pull Ukraine out of hot water. Dragon analysts quoted PM Tymoshenko as saying Wednesday that the loan agreement was 90% finalized, with the loan amount expected to be $10bn-15bn. And newswires quoted Tymoshenko as saying the IMF would announce the loan and conditionality that day. However, this did not happen. “We do not expect the IMF package to be finalized until next week,” reckons UkrSib’s Afonina.

When such a package does come through, it will still depend on Ukrainian politicians implementing the conditions. And with the current fractured political situation in Kyiv, even this can’t be taken for granted

Russian officials dismiss devaluation as ruble falls to two-year low

Graham Stack for business new europe (www.businessneweurope.eu)

Russian Deputy Prime Minister Igor Shuvalov today assured the Financial Times that the government is not intending to devalue the rouble but would use reserves to support the currency. As trading started on Moscow's MICEX, the ruble fell to a two year low against the dollar.

“We don't have any plans for this [devaluation]. We consider that a devaluation would be harmful… We are thinking, 'These are reserves, let us use them as reserves,' the FT quotes Shuvalov as saying.

However, the ruble fell to a two-year low against dollar in the first minute of trading today Wednesday 22 October. The dollar gained 32 kopecks against the ruble, trading at 26.91 rubles, a level not seen since the summer of 2006.

With oil prices falling to under $70 per barrel, rumors of looming devaluation of the ruble started to circulate at the end of last week.

By end of day Friday, October 17, the rate at private exchange bureaus had dropped to 5-7% below the official rate.

Answering such rumours with deeds instead of words, Monday October 20, the CBR first cut the currency swap facility on Friday evening. It placed a limit (50 billion rubles a day, while activity had reached $10 billion) on currency swap, that is, short-term credit using foreign currency as collateral.

As a result, foreign banks were extremely short of rubles, raising domestic interest rates to sky-high levels: overnight rates jumped above 20%, according to Alfa Bank.

On Monday, the CB then appreciated the ruble against the basket by some two kopeks (1%) to stabilize the market.

However this has proved to have been a short lived trend.

According to business daily Kommersant, analysts say that, in the long-term, the ruble will weaken as a consequence of oil prices and the situation on the credit market, and this may even start this week. They expect the ruble to fall about 5 percent.

In comments made to journalists yesterday, October 22, Deputy Prime Minister and Finance Minister Alexei Kudrin said Central Bank's $540bn reserves were sufficient to ensure exchange rate stability.

“The exchange rate will be stable with such a volume of gold and forex reserves,” he said, adding that, “speculators on the currency's exchange rate will be very disappointed,” according to Interfax.