MBS Blog

Pegging a currency in a tumultuous global financial market may have short term gains, mostly political, but in the long run it’s a huge mistake. Although it is politically difficult to float the Ukrainian currency now, it’s important that the world know the real market UAH/dollar rate. Currency fluctuations are one important way of assessing the risk of emerging markets. Such is the dilemma of central banking. It must be perceived as politically independent and transparent in its decisions, but its duty is at some level to help the people survive difficult times. Artificially raising the value of UAH is fight against real reforms that albeit painful are still necessary to secure the state currency. Forcing people to buy and sell at certain rates is a negative sign to investors that will only make the pain of coming reforms last longer and further depreciate the currency over the medium term.

Hryvnia Plunges as Ukraine Warns Banks to Keep to Official Rate

Ukraine’s currency tumbled for the first time in seven days even as the central bank warned 17 lenders not to buy or sell the hryvnia for less than the exchange rate it sets, according to Bloomberg.

“We have contacted the first group and issued warnings,” Serhiy Kruhlik, the central bank’s head of external relations in Kiev, said in a telephone interview today. “We’ll talk to a second group this week and the approach will be the same.”

Ukraine’s currency has slumped 42 percent against the dollar in the past six months, the second-biggest loss worldwide, causing the central bank to drain a third of its foreign-currency reserves. The ex-Soviet republic, which is struggling to fund a $12.3 billion current-account deficit amid frozen credit markets, is receiving a $16.4 billion bailout loan from the International Monetary Fund on the condition that it avoid further depletion of reserves.

The hryvnia had stayed unchanged at 7.8500 per dollar for the past week, close to the average 7.98 per dollar set by the central bank on March 6. The currency tumbled as much as 4.9 percent to 8.2350 today as bid and offer prices ranged beyond the average level set by the Natsionalnyi Bank Ukrainy, according to data compiled by Bloomberg.

“This is a tussle between the banks and the NBU,” said Dmitry Gourov, a Ukraine economist in Vienna at UniCredit SpA, Italy’s largest bank. “The central bank could easily make a scapegoat of one particular bank, there’s always that risk.”

‘Verbal Warnings’

The central bank made “verbal warnings” to the country’s larger banks last week that they may lose the right to buy foreign-currency reserves if they traded the hryvnia below the central bank’s rate, said Alexander Pecherytsyn, head of financial markets research at ING Groep NV in Kiev.

Banks adhered to the order because they “fear action from the central bank, such as the withdrawal of their licenses,” Pecherytsyn said. “Some of the smaller banks trade it at a weaker rate but that doesn’t show up on the screens.”

Credit Suisse Group AG hadn’t received any warning from the central bank, said Nikolai Yukovich, a data manager in Moscow. The bank had a bid for hryvnia at 8.2450 per dollar today and offered the currency at 8.3950, according to prices on Bloomberg. Traders at Galt & Taggart Holdings Inc., a Kiev-based brokerage, are seeing bid and offer rates at 8.34 and 8.42 per dollar today, said Jathan Tucker, head of trading.

Coalition

The hryvnia began tumbling in September when the collapse of the ruling coalition between President Viktor Yushchenko and Prime Minister Yulia Timoshenko raised concern that the government would be unable to implement policies to stem the fallout from the global financial crisis.

Standard & Poor’s cut the country’s credit rating two levels last month to CCC+, the lowest in Europe and seven steps below investment grade.

The government approved a budget deficit equivalent to 5 percent of gross domestic product, even as the IMF demanded a balanced budget as part of the conditions for its loan, which is being paid in tranches.

Ukraine’s economy will contract at least 5 percent this year, according to Yushchenko, as steel companies like Yenakievsky Metalurhiyny Zavod reduce output. Industrial production plummeted 34.1 percent in January, while the country’s 20.9 percent inflation rate is the highest in continental Europe. The central bank forecasts inflation of “at least 15 percent” in 2009.

permanent URL of article:

http://www.unian.net/eng/news/news-305002.html

The last week here in Ukraine has been interesting. Just when you think you have seen or heard it all, you get surprised. Well…the surprise for us here “on the ground” are the depths people will go to convince themselves that things are OK when they know they are not.

I am referring-indirectly-to the real estate market here in Ukraine. While there are new market realities, it seems that the average Ukrainian, and landlords in particular, have not gotten the message. Many still believe that the global economic crisis is happening somewhere else to someone else. Of course, the standard line in Russia and Ukraine is that it is America’s fault.

Even as their friends are fired from jobs, or their own pay is cut or their salary unpaid for the last 3 months, there is a stubborn streak within the Ukrainian soul that does not allow it to acknowledge the obvious. Of course, there is a global economic crisis out there and everyone, everywhere is affected. Wealth, businesses and jobs are disappearing.

As we have noted on this site for the last month, the value of the Ukrainian currency is evaporating quicker than a drop of water in the desert. You would think that would change the perspective of people here.  

When I went to look at a new apartment for myself over the last week, few of the landlords I met with considered negotiating the rents down a bit from pre-crisis bubble prices…even when foreign currency is offered as the form of payment. You would think they would look at the value of the hryvnia shrinking every day and be happy to take a bit less, knowing that they are being paid in a currency that still has some value (for how long Mr. Obama and Mr. Bernanke?).

Of course, the Ukrainian Government is playing the “if you can’t beat them, confuse them” strategy with the currency. A late week intervention by the Government pushed the value of the hryvnia  up quite a bit. Naturally, people took that as a sign that things weren’t that bad after all (those Americans are just spreading gloom and doom!!) so they stopped talking real estate price adjustments, and went shopping. Reports from friends in four Ukrainian cities suggest that the crowded stores I was seeing here in Odessa were no aberration.

Well…the news this morning was that the Prime Minister (the super wealthy blonde with the braid) had accused the President (the formerly handsome one of Orange Revolution fame) of playing currency games so that his cronies could make some money on some contrarian bets. Of course, as soon as the games end the hyrvnia will go back to its original trajectory (it has dropped over 50% since May 2008). Is the IMF watching?

Meanwhile, I am out of the market until after the holidays. I figure once the holidays end, the “hangover” is going to be just the time to talk with people about real estate. In fact, many of businessmen we know are headed here from Europe and the USA, but with investment real estate plans on their minds.

Technorati Tags: Ukraine, currency, hryvnia, Ukrainian Government, President Obama, Prime Minister, President, Orange Revolution, USA, IMF, Ben Bernanke, , Anton Olff, real estate, rentals, landlords, Russia, global economic crisis, wealth, regulations,

Even if you discount the deeply embedded fatalistic perspective of many Ukrainians, this poll on www.unian.net  gives you an accurate read on the current mood of people here. With the continuous infighting and stagnation in Ukrainian politics, a rapidly declining currency, jobs drying up, and the constant drumbeat in the media that things will get worse (they never say when it will get better), it is no wonder many Ukrainians are downright grumpy.

Indeed, the words people here are using to describe the situation is that “it will be a cold winter.” Best medicine: hot borshch and cold vodka.

The best guess…and that is all it is…attitudes will remain this way until the middle of next year. As the weather improves, so will the spirits of Ukrainians. The flip side of fatalism is an ability to enjoy the small pleasures in life to their fullest extent.

 09.12.2008 12:20]  

Ukrainians break record of pessimism

Sociological polls have revealed a record level of social pessimism in Ukraine. In particular, residents of different regions have been extremely pessimistic in assessing the political and economical situation in Ukraine, and their own life.

These are the results of a poll carried out by “Research & Branding Group” in November of 2008 and were presented at a press conference by company’s sociologist Yevhen Kopatko.

According to an UNIAN correspondent, in particular, according to the results of the poll, in November of the current year, some 92% of Ukrainians assessed the political situation in Ukraine as unstable, only some 1% of those polled assessed it as stable, and some 7% assessed it as rather unstable. At the same time, in December of the year 2007, some 62% of those polled assessed the political situation in the country as unstable, some 10% assessed it as stable, and some 28% - as rather unstable.

Besides, some 89% of respondents assessed the country’s economic situation as bad. Some 2% of those polled assessed it as good, and some 9% assessed it as not bad and not good. In December of 2007, the economic situation in Ukraine was assessed as bad by some 58% of those polled, as good – by some 5%, and as not bad but also not good – by some 37%.

Asked about whether they were satisfied with their life, some 29% of those polled said they were satisfied, some 67% - unsatisfied, some 3% could not answer the question, and some 1% said they are both satisfied and unsatisfied.

The poll was carried out on November 22-30 in 24 Oblasts of Ukraine and the Crimean Autonomous Republic. In the whole, 2 thousand 87 people were polled. The error margin does not exceed 2.2%.

Technorati Tags: fatalism, Ukraine, borshch, Ukraine Oblasts, Crimean Autonomous Republic, Yevhen Kopatko, pessimism, Research & Branding Group, www.unian.net, vodka, Ukrainian politics, currency, media, Anton Olff,

KIEV, Ukraine — The National Bank of Ukraine has unveiled its intentions to intervene Dec. 8 through Dec. 12 so as to revaluate the hryvnia.Anatolii Shapovalov, the NBU first deputy governor, also expressed hope the national currency has bottomed out in value.

“We will hold interventions next week in addition. As soon as people understand that the exchange rate [of foreign currencies] goes down and start to sell the dollars, everything will become calm,” Shapovalov said.

Shapovalov did not disclose how many interventions there will be next week and on which days the National Bank will intervene.

He noted that the devaluation of the hryvnia stopped in early December and a trend for the revaluation of the national currency emerged then.

“The exchange rate trend has swung round. Possibly, this is the bottom we wanted to reach. As soon as people stop [purchasing foreign currency], there will be a result. There are no economic preconditions for the current exchange rate,” the NBU first deputy governor said.

According to Shapovalov, the difference between the value of foreign currency bought by the Ukrainian population and the value of foreign currency sold by the population was USD 2.7 billion in January through September. This index grew to USD 6 billion in October and November.

As Ukrainian News earlier reported, the National Bank of Ukraine has said Ukrainian population sold more foreign currency than bought as registered on December 3 for the first time over the past few weeks.

The balance of the value of foreign currency sold by the population over the value of foreign currency bought by the population on December 3 was equivalent of USD 15.6 million.

The balance of the value of the cash dollars sold by the population over purchased cash dollars was USD 13.5 million on December 3. The trend has been registered for the first time over the past two months.

The cash sell rate for US dollars in Kyiv forex outlets fell by 1.2 kopeck to 7.5600 UAH/USD on December 5, as of 10:30, compared with data as of 9:30.

The National Bank of Ukraine has set its official exchange rate of UAH7.3614/USD1 for December 5 through December 7 and of UAH7.3598/USD1 for December 8.

Technorati Tags: Anatolii Shapovalov, Anton Olff, ATMs, currency, exchange kiosks, exchange rate, foreign currency, forex outlets, hryvnia, Kyiv Post, National Bank of Ukraine, NBU, U.S. dollar, Ukraine, Ukrainian Government

Two articles of interest. The first is a currency update from www.businessneweurope.eu  The consensus on “the street,” in Odessa and Kyiv, is that the hryvnia will continue its slide as the Ukrainian government will not have the resources to intervene in the currency markets.

The second is from www.ukrnews.com This article deals with the anticipated temporary rise in the hryvnia that occurs around holidays. Anyone visiting Ukraine during this summer will recall that the hryvnia was pegged at a seemingly unrealistic 4.60 to the U.S. dollar, only to depreciate significantly once the season had ended.

After the holidays, may come the hangover!!

Ukraine moves to flexible exchange rate as hryvnia slides 50%

James Marson in Kyiv
December 3, 2008

With Ukraine’s central bank curtailing moves to support the free-falling hryvnia, the local currency has slid further from 5.79 to the dollar on November 18 to 7.24 on December 3, marking an almost 50% drop in value since the start of the year. The central bank now believes the market has almost found the “satisfactory” rate.

After massive currency interventions in October caused the country’s foreign exchange reserves to drop by $6bn, the National Bank of Ukraine (NBU) has started to move towards a flexible exchange rate, a condition of the $16.4bn loan the country got from the International Monetary Fund. “Without a flexible exchange rate, we can’t overcome the crisis. No amount of currency reserves would be sufficient,” Oleksandr Savchenko, deputy chairman of the NBU, told a conference organized by Fitch Ratings on November 27.

Currency auctions have been introduced to smooth the hryvnia’s slide to its equilibrium rate. “The market is looking for the satisfactory rate,” Savchenko said. “We believe it has almost been found.”

The hryvnia has come under pressure from all sides as the country’s exports plummeted, demand for dollars shot up to repay dollar loans and people converted their savings out of the national currency. “People have been rapidly converting into dollars - there’s low trust in the hryvnia,” says Olena Bilan, an analyst at Dragon Capital. “When the hryvnia started to fall in October, people rushed to get rid of their hryvnia holdings.” NBU figures show that Ukrainians bought $2bn more in foreign currency in November than they sold.

On the positive side, the hryvnia’s fall is a boost to struggling exporters and should help Ukraine close its current account deficit, which reached 7% of GDP in the second quarter of 2008. “The implications of a weak hryvnia are huge,” says Oleksandr Klymchuk, an analyst at Concorde Capital. “It raises the competitiveness of exporters and gives locally produced goods a price advantage over imports.”

But it’s also a threat to banks, as Ukrainians struggle to pay back their loans, 50% of which are denominated in dollars. Fitch on Friday downgraded the outlook for 11 of the country’s banks, citing concerns about the deterioration in asset quality and the threat to confidence in the currency. “The devaluation pressure will persist into next year. It’s difficult to predict where the exchange rate will move, as it’s a question of confidence,” Bilan said.

A recovery of the hryvnia next year is likely, analysts say, as people convert their money back into hryvnia to spend, and a tight monetary policy from the NBU restricts hryvnia supply. If currency inflows from foreign direct investment and privatization pick up, the hryvnia should stabilise around 7.5, Klymchuk believes. If not, he predicts the rate could slide as far down as 9 or 10 hryvnia against the dollar.

Bankers Expecting Traditional Strengthening Of Hryvnia On Eve Of New Year (16:09, Wednesday, December 3, 2008)

Bankers are expecting the traditional strengthening of the hryvnia on the cash market on the eve of New Year to take place this year.

“I think that there will be a situational strengthening,” said Viacheslav Utkin, a member of the supervisory board of Enerhobank.

According to Utkin, the hryvnia will strengthen because of winter holidays and vacations.

“There will be large expenditures ahead of the holidays, the vacations,” Utkin said.

According to him, the hryvnia’s cash rate could reach 7 UAH/USD.

Erik Naiman, the head of the department of financial instruments at Ukrsotsbank, is also not ruling out the possibility of the cash rate of the hryvnia rising before New Year.

“That happens [traditionally] because people sell dollars in order to have a good holiday,” he said.

Naiman declined to forecast the margin by which the hryvnia with strengthen, but he said that it would be insignificant.

AvtoZAZbank’s Board Chairman Vladyslav Bairak was unable to forecast a possible strengthening of the hryvnia on the eve of New Year.

“At present, I do not have such confidence,” Bairak said.

According to him, citizens have shown a lack of confidence in the hryvnia in the past month.

As Ukrainian News earlier reported, the hryvnia fell by 5 kopecks to 7.45 UAH/USD on the inter-bank currency market on December 2.

Technorati Tags: currency, bankers, AvtoZAZbank, Vladyslav Bairak, cash, Erik Naiman, Ukrotsbank, Viacheslav Utkin, Enerhobank, monetary policy, devaluation, current account deficit, GDP, Oleksander Klymchuk, Concorde Capital, Dragon Capital, Olena Bilan, National Bank of Ukraine, NBU, International Monetary Fund, IMF, Oleksandr Savchenko, flexible exchange rate, www.businessneweurope.eu, Odessa, Kyiv, Ukraine, www.ukrnews.com, Anton Olff, hyrvnia,