Ukraine gross reserves drop 3.5% in September

Ukraine’s gross international reserves dropped 3.5%
m/m, or USD 0.59 bln, to USD 16.34 bln in September owing to the repayment of
FCY-denominated state debt, the National Bank of Ukraine (NBU) reported on Oct.
5. Ukraine’s reserves have been in decline for five
months in a row, losing USD 2.2 bln YTD. September payments on servicing
international bonds amounted to USD 711.2 mln, while local Eurobond redemption
and servicing required USD 103.2 mln.

September foreign currency inflows included receipts
from local Eurobond placements for USD 48.6 mln. In addition, the net purchase
of foreign currency by the NBU on the ForEx was positive in September,
amounting to USD 18.8 mln. The NBU also reported on a securities revaluation of
USD 13.5 mln (adjusted to market value and the currency exchange rate), which
also had a positive effect on reserves.

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

Evgeniya Akhtyrko: We expected significant losses in gross reserves
amid high repayments on state debt and the absence of external sources of
financing. Moreover, we don’t see opportunities to replenish foreign reserves in
October. The government should spend around USD 750 mln on local Eurobond
repayments this month, yet local Eurobond placements remain the only available
source for reserves replenishment. The government may raise more foreign
currency with its recent interest rate hike on its local bonds, but it will
likely finish October with reserves losses of USD 300-400 mln nonetheless.

Ukraine’s reserves are now below the
internationally recognized safe level of three months of gross imports for the
second month. Securing an IMF loan tranche is the only way to bring reserves
back to safety. In this scenario, an IMF tranche of up to USD 1.9 bln,
additional loans from the EU and World Bank for USD 1.4 bln, and an expected
Eurobond placement of about USD 1.5 bln would enable reserves to rise to a safe
level of USD 19.6 bln at the end of 2018, according to our projections. For a
positive decision from the IMF, Ukraine still needs to agree to adjust its
natural gas price for households and adopt a realistic 2019 state budget.