Gross international reserves plunged 23.2% down to $12.6 billion in October

UKRAINE - In Brief 10 Nov 2014 by Dmytro Boyarchuk

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In October gross international reserves plummeted by $ 3.8 billion down to $12.6 billion, the Central bank reported on Nov. 7. The decline appeared much stronger than expected. We recognized that $1.6 billion redemption on Naftogaz Eurobonds and state debt redemptions (including $233 million to the IMF) will push gross reserves down by at least $2 billion. However, the slump appeared almost twice stronger than expected. The desire of the authorities to show hryvnia ‘stability’ before parliament elections cost dearly for gross reserves ($1.2 billion interventions) and was the main reason for deeper decline. Now the situation looks very shaky for the country. After Ukraine agreed for Gazprom’s demands on gas debt redemptions ($3.1 billion of debts) we see gross international reserves breaking new psychological level of $10 billion by the end of the year. Let alone state debt redemptions ($190 million to the IMF) and probable $1.5 billion prepayments for Russian natural gas imports. No surprise, in the face of such outlook the Central bank finally decided to give up with ‘frozen’ exchange rate at 12.95 hryvnia per $1 which was set before elections. Starting Nov. 5th the Central bank announced new policy which targeted to probe new balanced level of hryvnia with very minor FX interventions. As a result, just in two days hryvnia went down by 13% to 15.2 hryvnia per $1 as of Nov. 7. Virtually, against the backdrop of steady narrowing CAD we see current hryvnia hikes as substantial overshooting. However, the problem is that market players lost confidence on the Central bank and do not have any view even for the nearest future. This uncertainty drives extra demand for foreign ...