Ukraine's national currency, the hryvnia, tumbled to a three-year low of 8.27 to the dollar on Wednesday amid widespread expectations of a devaluation, possibly to a level of 8.40, according to dealers.
With last month’s election out of the way, market players expect the authorities, who have kept the hryvnia pegged at around 8 to the dollar since early 2010, to allow some depreciation soon to plug widening trade and current account deficits and secure a resumption of IMF lending.
“There have been practically no offers for sales of dollars. Everybody is expecting a fall to about 8.40,” said one dealer at a major bank.
Though the hryvnia touched 8.27/8.30 during trading, according to dealers, it ended at 8.25/27 on Wednesday after the central bank intervened, offering to sell dollars at 8.05 hryvnias per dollar.
Analysts polled by Reuters this month predicted that the hryvnia would dive to 9 to the dollar in 2013 with authorities no longer needing to waste foreign currency reserves on keeping the currency at its current pegged rate while the trade deficit widens.
These analysts saw the hryvnia trading at 8.40 per dollar by the end of 2012.
Before Wednesday’s intervention, the central bank had not stepped in to support the hryvnia since Nov. 5 when it offered to sell dollars again at 8.05 hryvnias. Its absence since then had raised speculation it is ready to allow the currency much more flexibility, although any devaluation is expected to be gradual.
Central bank officials have been at pains to play down talk of a devaluation.
“We had an unusual month in October linked to the elections. All national elections are accompanied by a surge in net demand for foreign currency … At the end of the elections, demand usually subsides,” Sergiy Korablin, a central bank official, said on Tuesday at a conference in Kiev.
In a sign of the authorities’ concern at the outflow of foreign currency, Ukraine’s parliament voted on Nov. 6 to give the central bank legal powers to force exporters to convert at least part of their foreign currency earnings into hryvnias. The law requires President Viktor Yanukovich’s signature before it can come into effect.
“The National Bank is not intervening because the authorities clearly want to resume cooperation with the International Monetary Fund, which is recommending a more flexible hryvnia,” said Olexander Okhrimenko, head of the Ukrainian analytical centre, an independent research house.
“We can even expect a strengthening of the hryvnia if compulsory sales of foreign currency earnings by exporters are introduced and IMF credit is resumed,” Okhrimenko said.
The IMF, Ukraine’s key lender, froze its $15 billion aid programme for the former Soviet republic last year after Kiev, wary of a political backlash, chose not to raise household gas and heating prices as recommended by the Fund.
The trade deficit widened to$9.3 billion in January-September 2012 from $6.2 billion in the same period of 2011, according to central bank data. Analysts attributed the rising deficit mostly to declining steel exports and the high price of gas imports.
Analysts, who do not expect a quick recovery in global demand for metals, have raised their trade deficit forecast for 2012 to $13.60 billion, from $11.65 billion in a Reuters poll last month. They see the trade deficit at $12.15 billion next year, compared with $10.2 billion in 2011.
Ukraine’s current account deficit widened to $9.276 billion in January-September 2012, from $5.895 billion in the same period last year. (Reporting by Natalia Zinets; Writing By Richard Balmforth; Editing by Susan Fenton)
