OREANDA-NEWS. December 28, 2012. November and the first half of December marked another eventful period for Ukraine but have so far brought little clarity as regards post-election economic policies. Parliament approved the 2013 budget bill, suggesting fiscal consolidation on the general government level of 0.4% of GDP, to 3.3% of GDP. It remains unclear, however, whether key budget parameters will satisfy the IMF. The IMF mission visit, originally scheduled for December, has been postponed until late January due to uncertainty over the government reshuffle. Economic policy uncertainty, including the lack of clarity on cooperation with the IMF amid rising external funding needs, triggered one-notch downgrades of the country’s sovereign ratings by Moody’s (to B3) and S&P (to B).

?Capitalizing on favorable external markets, the government placed USD 1.25bn of 10-year Eurobonds at a yield of 7.8% on Nov. 19, bringing its YTD Eurobond issuance to almost USD 4bn. A USD 550m 5-year Eurobond placed by a state-owned infrastructure company followed shortly. Despite the government‘s external borrowings, NBU reserves declined by 5.4% m-o-m in November, to USD 25.4bn, slipping below the 3-months-of-imports threshold for the first time in almost a decade.

As pressures on the currency remained high despite extremely tight monetary conditions, the authorities turned to administrative F/X measures introducing a 50% export surrender requirement (Nov. 19) and threatening to impose a 10% or 15% tax on F/X cash sales aimed at curbing local F/X demand, a key source of currency pressures. This helped stabilize the F/X market and bring the hryvnia rate to UAH 8.11:USD as of Dec.12 from the mid-November peak of UAH 8.30:USD.

While administrative measures will buy some time for the NBU, they will not improve Ukraine’s fundamentals. The country’s C/A deficit reached 8.0% of 2012E GDP on a 12-month trailing basis in October, exceeding the 2008 record, and domestic devaluation expectations also remain high. Considering negative steel price dynamics and the high price of imported gas Ukraine pays, the country can hardly avoid a currency adjustment. Compared to 2008, Ukraine’s overall balance of payments position looks stronger thanks to corporate borrowings and solid FDI, justifying smaller currency depreciation compared to the hryvnia’s 36% slide in 2008. However, to avoid sharp and uncontrolled devaluation, economic policies need to be changed quickly. In this respect, the recent re-appointment of Mykola Azarov as prime minister and expected formation of a new Cabinet should reduce political uncertainty and add clarity to near-term economic policies, including on resumption of cooperation with the IMF and related policy issues such as currency flexibility.