By Sabina Zawadzki
KIEV, Dec 17 (Reuters) - Ukraine's hryvnia sank to a fresh record low to the dollar on Wednesday and markets give it little chance of a recovery soon as central bank reserves are limited by IMF conditions and its gas debts boost dollar demand.
The hryvnia, one of the world's worst performing currencies since the credit crisis deepened this year, has seen its rate to the dollar double from 4.66 in September to a reported 9.45 per dollar on Wednesday.
Only the scale of the slump has surprised, however, with analysts saying the currency had long been due for a reality check as Ukraine adapts to a change in its relations with Russia on energy, falling steel prices and the global credit squeeze.
The International Monetary Fund has agreed to lend Ukraine $16.8 billion. But it imposed conditions which include scrapping an arbitrary official rate and letting the currency float more freely by imposing quarterly central bank reserve minimums.
Analysts have said the IMF programme sought to impose a correction on the economy, steadied artificially by a pegged currency and weighed down by a fast-expanding current account gap.
WHY IS THE HRYVNIA FALLING?
- Analysts have long warned that economic fundamentals point to a weak hryvnia -- the trade gap, exacerbated by steep gas import price hikes, had been offset only by inflows of dollars from exporters and foreign investors. Both are now falling.
- Exports have slowed as global demand and prices for steel and chemicals have fallen, but the central bank thinks exporters have hoarded $9 billion in anticipation of an even higher rate. - Dealers believe state energy firm Naftogaz has been trying to buy dollars to pay $2-2.5 billion in debts for Russian gas imports and that this has prompted the steeper fall in the currency in recent days.
HOW LOW CAN IT GO?
- Analysts have been changing their hryvnia forecasts virtually every day. At the start of the month, no one voiced openly the opinion that the hryvnia would fall below 7.5.
- One analyst on Tuesday forecast 7.5/$ by the end of the year, another said 10.5/$ in three months was reasonable, yet dealers now say 10/$ was realistic by the end of the week.
- But they, too, have been changing their opinion daily and say that central bank intervention and currency auctions impose restrictive rules, making it difficult to buy dollars. So demand remains, pushing the hryvnia lower.
- "The trend is rising -- by the end of the week we could test 9.5-10," said one dealer. Another said: "No one knows what the final figure could be, where the hryvnia's fall will stop."
- The central bank probably has somewhere between $1-1.4 billion in reserves that it can spend this month to support the currency before hitting the IMF-set floor of $26.7 billion. It spent $7.7 billion on intervention in September-November.
- The central bank had previously obliged exporters to sell their dollars and may try to reintroduce the rule. But this would require new legislation passed by the fractious parliament many of whose members are large businessmen.
AND THE REAL ECONOMY?
- Long-term, analysts hope the IMF programme helps Ukraine makes the quantum leap to a sustainable and diversified economy, through the imposition of a free-floating currency, a corrected balance of payments and investment in modernisation.
- Government officials have said the hryvnia's fall has helped exports -- now priced more competitively -- which would ultimately reduce the trade and current account gaps.
- But Ukraine's economy is highly dollarised and in the short term, the hryvnia's plunge is impacting on consumers who pay far more to service dollar-denominated debts or mortgages.
- "At the rate we have today ... we can forecast that 60 percent of credits will not be paid back," Roman Zhukovsky, a presidential aide, said on Wednesday. "There has been a failure to meet payments on 20 percent of mortgage loans extended in foreign currency."
- Such defaults would destabilise the banking sector, but the IMF's money is aimed as much at recapitalising the banking sector as bolstering reserves and providing a bridge loan to the government.