“Guess NBU rate” game

During last days, the Ukrainian FX market continued to be guided by the NBU. National Bank of Ukraine changed its behavior and begun to enter the market at the end of the day instead of the morning. Thus, market players are now playing the game “let’s guess what the NBU’s intervention rate for today will be”, experts of Astrum Investment Management say.

They maintain their view that the NBU will not go far with its exchange rate adjustments, as it continues to pursue its de facto fixed exchange rate policy.

At the same time, the NBU will need to show some degree of “fluctuations” to the IMF, as the Fund does not favor a fixed rate policy. Thus, further “cosmetic” exchange rate adjustments are possible. During the last week, the hryvnia gained less than 0.2% against the dollar.

Ukraine's foreign and local currency sovereign ratings rise

S&P raised Ukraine’s foreign currency sovereign credit rating by one notch to ‘B-/C’ from ‘CCC+/C’ and the local currency rating to ‘B/B’ from ‘B-/C’, with a positive outlook on the country. The agency said the new governing coalition and cabinet pave the way for a renewal of relations with the IMF and better policy coordination that will allow Ukraine to restore economic and fiscal sustainability. S&P noted the positive outlook on Ukraine indicates “upward pressure on the ratings building this year and next if fiscal and external pressures abate.” Additionally, the agency noted greater investor confidence post-election will favour a higher external debt rollover rate and larger FDI inflows to the country, thus improving Ukraine’s financial account balance in 2010. Ukraine was downgraded to ‘CCC+/C’ in February 2009 on the back of risks to IMF funding to the country.

Sell-side firm forecasts grivna exchange rate for 2010

Dragon Capital, one of the largest Ukrainian investment companies, forecasts foreign exchange rate to be 7.5 grivna for 1 USD at the end of 2010. UR sees this prediction as too optimistic, considering recent sudden and sharp fluctuation of Ukrainian currency rate after the end of New Year vacations. Since 7th of December, grivna has lost almost 2.5% of its value against dollar during 4 days, reaching its September’09 levels – 8.20. Only due to intensive market interventions by National Bank of Ukraine, hryvna/USD rate is now 8.07.

These fluctuations are the reason for doubts regarding the peaceful future of grivna in 2010. According to Dragon’s forecast, the revalutaion will be supported by inflow of capital (strange assumption, considering worsening of financial condition of Ukrainian leading corporations) and economic growth (almost eqal to zero).

What was left out in Dragon Capital's assumptions is growth of public debt, worsening of quality of credit portfolios of Ukrainian banks, and predicted defaults of construction companies. All these factors, as well as possibility of sovereign defaults of emerging countries can cause zero capital inflow in Ukraine in 2010.

Regarding IMF loans, it is possible to predict that Fund will provide limited loans sufficient only for preserving national currency from sharp devaluation. Restriction of cooperation with the IMF in 2010 will be caused by overwhelming populism of Ukrainian government with its desire to control NBU and currency reserves.

To summarize, Dragon capital’s opinion represents the desired scenario for a sell-side company. Nevertheless, it seems to us in UR that the map of risks for Ukraine is a bit different.