Ukraine gross reserves drop 2.9% in August

Ukraine’s gross international reserves dropped 2.9%
m/m, or USD 0.52 bln, to USD 17.23 bln in August, the National Bank of Ukraine
(NBU) reported on Sept. 5. The losses were due to the NBU’s boosted sale of
foreign currency on the ForEx. The central bank sold net USD 651 mln during
August in order to smooth out the excessive volatility on the ForEx. Other
foreign currency outlays during the month included IMF payments in the
equivalent of USD 668 mln and other state debt repayments of USD 448 mln.

August foreign currency inflows included the receipts
from a private placement of international Eurobond for USD 725 mln and
local Eurobond placements for USD 382 mln and EUR 69 mln.

As of Sept. 1, Ukraine’s gross international reserves
amounted to 2.9 months of imports.

Evgeniya Akhtyrko: During
August, monthly depreciation of Ukraine’s national currency amounted to 3.9% –
the highest rate since September 2016. However, without the central bank’s
support, Ukraine’s hryvnia was likely to lose much more in value, and this
could have further triggered the depreciation spiral. To stop the hemorrhaging,
the government came up with quite an unexpected private placement of 6M
international discount notes for USD 725 mln with a yield to maturity of 9.2%
on Aug. 23. This borrowing was needed as reserves were likely to plunge as low
as USD 16.5 bln otherwise.

In September, Ukraine’s reserves are likely to get
leaner again, with scheduled payments of USD 554 mln on international sovereign
Eurobond coupons and redemptions of local Eurobonds for USD 100 mln. At the
moment, we don’t see other ways for reserves replenishment except receipts from
new placements of local Eurobonds, which haven’t been in high demand (this
inflow is not likely to compensate the expected payments).

Securing an IMF loan tranche is the only way to bring
reserves back above the safe level and restoring foreign borrowing. We expect
the outcome of the current IMF mission to Ukraine, which will perform its
review between Sept. 6 and 19, will be positive
and the last critical issue, natural gas pricing for households, will be
resolved soon.

In this scenario, an IMF tranche of around USD 1.9
bln, additional loans from the EU and World Bank for USD 1.4 bln, and an
expected Eurobond placement of USD 1.5 bln will cause reserves to rise to the
safe level of USD 20.0 bln at the end of 2018, according to our projections.