By Michael Patterson and Laura Cochrane
Dec. 19 (Bloomberg) -- Ukraine’s currency, down 50 percent against the dollar since June, may weaken another 24 percent as the International Monetary Fund restricts the former Soviet nation from halting the slide, Commerzbank AG says.
“It’s like a freefall, a falling knife,” said Michael Ganske, head of emerging markets in London for Commerzbank, Germany’s second-biggest bank. “The central bank has limited ammunition and ability and willingness to support the currency.”
The IMF’s $16.4 billion bailout package, agreed to last month, requires Ukraine to move toward a flexible exchange rate and prohibits reserves from falling more than 4 percent by yearend from about $32.8 billion now. While the pact permits intervention to stem “disorderly” swings, Ganske said such a decision “would be stupid.”
Ukraine’s central bank raised its refinancing rate to 18 percent yesterday from 17 percent to arrest the hryvnia’s decline after it fell as much as 18 percent in two days. The currency pared its decline yesterday to 9.1 per dollar from as weak as 9.78 as policymakers sold reserves and said a rate above 9 was “unacceptable.” At the start of the year, the dollar bought 5.04 hryvnia.
President Viktor Yushchenko threatened to fire central bank employees this week and Prime Minister Yulia Timoshenko demanded National Bank of Ukraine Governor Volodymyr Stelmakh’s dismissal. The country’s ruling coalition collapsed in September amid disagreement between Yushchenko and Timoshenko, before forming again this month.
Steel Stocks
Ukraine’s benchmark PFTS stock index has dropped 74 percent this year, the third-steepest retreat among 22 so-called frontier markets tracked by MSCI Inc. Mariupolsky Metallurgical Plant, Ukraine’s largest steel company by revenue, slid 92 percent in trading in Kiev.
The extra yield investors demand to own Ukrainian government bonds instead of U.S. Treasuries has increased more than nine times this year to 25.86 percentage points, according to JPMorgan Chase & Co.’s EMBI+ indexes. That compares with an almost three- fold increase in the main emerging-market index to 7.09 percentage points.
“I wouldn’t like to be in the shoes of the central bankers right now,” said Alexander Morozov, chief economist in Moscow for HSBC Holdings Plc, Europe’s biggest bank. “There’s not much of a way out.”
Yushchenko’s economic aide Roman Zhukovskyi said this week that 60 percent of foreign-currency loans and mortgages may go into default because of the decline.
Default Swaps
Ukraine, with $105 billion of corporate and state debt, has the fourth-highest credit risk worldwide, credit-default swaps show. The cost to safeguard Ukraine’s bonds against default jumped more than 13 times this year to 31 percent of the amount of debt protected, behind Ecuador, which defaulted last week, at 59 percent, Argentina, which reneged on $95 billion of bonds in 2001, at 46 percent, and Venezuala at 33 percent, CMA Datavision figures on Bloomberg show.
Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.
Ukrainian companies need to repay as much as $4.1 billion this month as lenders refuse to refinance the debt amid the worst global financial crisis since the Great Depression, according to Dmitry Gourov, an economist focusing on Ukraine at UniCredit SpA in Vienna. Dollar loans made up 53 percent of credit issued by Ukrainian lenders as of Sept. 30, the central bank Web site says.
Shrinking Production
The economy, which relies on steel for 40 percent of exports, is weakening after production dropped 48.8 percent in November and prices tumbled. European hot rolled coil, the benchmark steel product, fell 47 percent since August to $425 a metric ton, according to data from U.K. industry publication Metal Bulletin.
The economy, which has expanded at an average annual rate of 7 percent since 2000, may shrink 5 percent next year, Oleksandr Shlapak, the president’s deputy chief of staff, said last month.
Industrial production shrank by a record 28.6 percent in November as steel, machine building and oil refining slumped, after a 19.8 percent decline in October, the Ukrainian Statistics Office said last week.
“This has to be stabilized now, and the only way to stabilize the situation is probably by tweaking the IMF program with more money and changing the conditions to reflect these new more difficult realities,” said Simon Johnson, a senior fellow at the Peterson Institute for International Economics in Washington and former chief economist of the IMF.
IMF Program
The IMF has allocated $4.5 billion to support the country’s banks, increase deposit insurance and boost funding for unemployment benefits, according to the last statement on the fund’s Web site, dated Nov. 5. Before the IMF deal, Natsionalnyi Bank Ukrainy drained $3.4 billion in November and $4.1 billion the previous month to manage the currency’s decline.
The IMF “doesn’t want to see its money wasted on defending a currency level that isn’t sustainable,” said Nick Chamie, head of emerging-market research at RBC Capital Markets in Toronto.
Balazs Horvath, the IMF representative in Kiev, said in an interview yesterday that the government needs to stick to the agreement “to keep the exchange rate from collapsing.”
The central bank will sell U.S. currency at a rate of 8.7 hryvnia per dollar today, 4.5 percent below the market exchange rate, Finance Minister Viktor Pynzenyk said in televised remarks yesterday. Central banks intervene when they buy or sell currencies to influence exchange rates.
‘Stricter Policy’
“We will have a stricter monetary policy,” Stelmakh, the central bank governor, said yesterday.
The central bank is calling for a law to force exporters to convert part of their revenue into hryvnia and a ban on household loans in foreign currencies, Petro Poroshenko, head of the central bank’s council, said late yesterday in Kiev.
“The central bank has asked exporters to sell their dollars, but in this situation exporters are reluctant to convert because they see a further dip,” said Mandar Jayawant, a managing partner at Singapore-based Frontier Investment & Development Partners, which manages private-equity funds in frontier markets and doesn’t have investments in Ukraine.
“The sovereign is in a position where it shouldn’t necessarily default on its debt,” Kevin Daly, who manages about $4 billion in emerging-market bonds at Aberdeen Asset Mangement in London, said in an interview on Bloomberg Television yesterday. “It clearly looks like it will continue to devalue.”
To contact the reporters on this story: Michael Patterson in London at mpatterson10@bloomberg.net; Laura Cochrane in London at lcochrane3@bloomberg.net
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