The hryvnia could tumble even as economy picks up

After a few months of relative respite from the economic whirlwind, economists are warning that a second wave of the crisis is awaiting Ukraine’s financial sector this autumn. While the country’s economy is already seen by many to have bottomed out, an anticipated fall in the hryvnia’s value will put pressure on people’s savings and ability to repay bank loans.

With a gross domestic product contraction of 20 percent in the first quarter of 2009, and last fall’s 40 percent slide in the value of the hryvnia against the U.S. dollar, the Ukrainian economy has already had to cope with a number of shocks. But it has muddled through, and recent months have seen a trickle of positive news, with consumer confidence edging up along industrial production and steel output, the country’s major export commodity.

But analysts said that the hryvnia is set to come under pressure after a few months of stability at a rate of about Hr 8 to the U.S. dollar. Ukrainian companies will be out buying up dollars to redeem any of the $10 billion in foreign debts that can’t be restructured. More certain is that state gas company Naftogaz will need to buy about $1 billion to pay for natural gas in coming months. And if the national currency starts to tumble, nervous citizens could dump their hryvnia.

“We can talk about the possibility of financial turmoil, but not another crisis like we saw last year,” when both the currency and industrial production plunged, said Olena Bilan, a macroeconomic analyst at Dragon Capital. “The new wave will be related to the foreign currency market, not the real sector [of the economy],” she added.

Bilan added that she saw possible unwillingness from the government to maintain strict fiscal policy – required by the International Monetary Fund – as the major potential cause of pressure on the hryvnia. “If the government fails to curb fiscal expenditure growth, increasing the fiscal deficit and monetizing it, it will create pressure on the foreign exchange market. The incentive to do so is very high,” Bilan said.

A rise to Hr 9 to the dollar – forecast by a number of experts – will put further pressure on Ukrainians’ ability to repay dollar-denominated loans on homes and cars. In turn, rising non-performing loans will test the country’s already struggling banking sector. The government has already bailed out three banks, and others are expected to go under. “The banking sector bears a lot of risks for the overall economy,” said Andriy Parkhomenko, economist at Concorde Capital. He estimates that the share of problem loans “could be as high as 20-25 percent.” Seventeen banks out of over 180 that are already under temporary administration.

Analysts say that small and medium banks are the ones most under threat, with the larger banks that are yet to have trouble less likely to experience problems.

Some analysts are less downbeat on the ability of the authorities to deal with the problems that could lie ahead. “In my view, talks of the ‘second wave’ are exaggerated. On the other hand, I don’t think that we will see any positive shifts in the economy this year,” said Parkhomenko.

The $3.3 billion loan recently received from the IMF – of which $1.9 billion is earmarked for repaying foreign debt – should ease the effects of debt repayments. Bilan said she also expects a higher roll over rate for the corporate debt in the second half of the year compared to the first half.

The National Bank of Ukraine and government have tools to keep the exchange rate in check – an arsenal of about $30 billion including national currency reserves and the IMF funds received this week.

“I don’t think the NBU will let [the rate] soar, as it is dangerous for an economy that is 40-50 percent dollarized,” said Parkhomenko.

And bad news for some is good for others. A weaker hryvnia will help to drive a recovery, as exporters benefit from lower expenses and Ukrainians shun more expensive imports in favor of domestic products. “It will make the recovery, which we expect to start next year, faster,” said Bilan.
By James Marson, Kyiv Post

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