Ukraine national bank expects non-declining gross reserves till year end

Reduced external payment pressures are enabling the National Bank of Ukraine (NBU) to expect at least non-declining gross reserves (at USD 23.1 bln) till the end of 2013, NBU Economic Department Deputy Head Serhiy Nikolaichuk stated on July 16, as reported by the Interfax news agency.

Alexander Paraschiy: Nikolaichuk’s message indicates the government is paying more attention to NBU reserves, which is a radical shift from earlier NBU statements that the size of reserves is not reflective of the economic condition. The recognition of shrinking reserves (which declined USD 1.5 bln in 1H13) could be the NBU’s first, long overdue step in remedying a problem. However, its expectation is unrealistic since we see few instruments at the government’s disposal to cope with the problem by the year end.

In July-November, Ukraine will have to pay back USD 2.9 bln to the IMF. The Finance Ministry will also have to repay domestic USD-denominated bonds at USD 1.4 bln. Then there’s the expected acceleration in natural gas imports, which should add to the trade deficit in the autumn months. Against this backdrop, preserving gross reserves at a non-declining level could be possible only if the Ukrainian government secures funding externally, either from the IMF or a Eurobonds placement.

We expect gross reserves to decline to USD 20.1 bln till the year end, given that we see no progress in negotiations with the IMF and MinFin has been unable to place Eurobonds for three months already.