NBU reserves fall 8.4% mom in October

The National Bank of Ukraine’s gross reserves shrank 8.35% mom (by USD 2.44 bln) to USD 26.81 bln in October (down USD 4.98 bln, or 15.7% YTD). This is the biggest decline in the last 12 months. NBU reserves are now equal to 2.8 months of Ukraine’s imports.

Alexander Paraschiy: Although broadly expected, the sharp decline in NBU reserves should create additional psychological pressure on both the local currency and sovereign risk. With about USD 0.45 bln of total outflows explained by a loan repayment to the IMF, we estimate USD 2.0 bln of the remaining decline was the result of NBU interventions to support the local currency. This implies the net foreign currency intervention increased by a third compared to September, clearly demonstrating enormous pressure on the hryvnia. The pressure is unlikely to ease in November, given the pre-election period is over (during which devaluation expectations were limited, as the market assumed the NBU would tightly control the FX market). Moreover, this month Ukraine will repay about USD 1 bln to the IMF and the Kyiv city government will need to purchase currency from the NBU to repay a USD 0.25 bln Eurobond. That said, we do not rule out that NBU reserves will fall even sharper in November. So far, we are keeping our estimate of end-2012 NBU reserves at USD 23 bln and the end-year hryvnia exchange rate at 8.4/USD, while we admit that there is a clear downside risk for both metrics.