UAH: Reviving after the Storm (November 24, 2014)

The UAH currency has declined by 45% YTD vs. USD due to political instability, imbalanced external sector, conflict in Eastern Ukraine and lack of certainty. While we think it is highly unlikely that hryvnia will recoup all its losses, we also believe that the USD/UAH exchange rate has “overshot” a balanced level and should return to a range of 14.5-15 along with new tranches of international aid and stabilization of conditions in the East of Ukraine.


Ukraine’s balance of payments improved to a moderate deficit of USD -663 mn in 3Q2014 from a more significant level of USD -4.2 bn in 1Q2014 (equivalent to 12% of GDP), after the UAH devalued to USD:UAH 12 from USD:UAH 8.24 in 2Q14. We believe the recent wave of devaluation, to USD:UAH 15 from USD:UAH 12, was mostly due to the panic associated with military actions in Eastern Ukraine and political instability. We believe the UAH should strengthen when panic subsides.

Financial support from the IMF and other international financial institutions (IFIs) should stabilize international reserves, the banking system and public finances, thus instilling confidence in the UAH to companies and the population. IFIs will further urge the government and parliament to pursue necessary reforms. At the beginning of 2015 Ukraine should receive funds from the IMF in the amount of USD 4 bn and another USD 8 bn through the end of the year. Moreover, the World Bank should disburse USD 1 bn in the first quarter of 2015. Next year the European Commission is expected to deliver EUR 1 bn to Ukraine. In total, Ukraine is expected to receive around USD 14.25 bn of international support in 2015.

The NBU’s international reserves stayed at the low levels of 78-88 days of imports in July-September 2014, limiting the ability of Ukraine’s Central bank to support the UAH. From April 1, 2014, international reserves decreased by USD 2.5 bn, or 16.6%, to USD 12.6 bn. We note this is still higher that the USD 11.3 bn floor required by the IMF. Nevertheless, the NBU committed to support the UAH in case of necessity, and the IMF during the upcoming review mission will discuss lowering the reserve floor.

Since summer 2014 the NBU has employed a number of administrative measures to tighten interbank and cash markets of USD. In the short-term, we expect increase of administrative regulation of banking system, including prohibiting pre-mature withdrawal of all deposits and increasing the banks’ capital requirements. In the intermediate term, the interbank and cash market should be liberalized. Moreover, we expect the parliament and the NBU to implement reforms in the banking sector. The banking reform and subsequent consolidation of the sector are expected to restore at least partially the USD 11.3 bn that individuals have withdrown from deposits since the beginning of the year.

The strengthening of the US dollar to key currencies put additional pressure on the UAH exchange rate. The USD rose 8.2% YTD vs. EUR, 16.5% vs. JPY, and 0.6% vs. CNY.

USD:UAH exchange rate volatility should decrease as the military conflict and political instability in Eastern Ukraine subsides. These are the main factors which negatively impact investors’ expectations for the Ukrainian economy. In 9M2014, Ukrainian GDP contracted 3.5% y/y. In 10M2014, industrial production declined by 9.4%, with most of the contraction in the Eastern regions of Donetsk and Luhansk (-27.6% y/y and -34% y/y respectively).


For full report please contact us by:

Phone: + 38 044 237 77 27, NY: +1 917 475 04 47

Email:  This email address is being protected from spambots. You need JavaScript enabled to view it.



Although the information in this report has been obtained from sources which Empire State Capital Partners believes to be reliable and was collected in good faith, we do not represent or warrant its accuracy, except with respect to information concerning Empire State Capital Partners, its subsidiaries and affiliates, either expressly or implied, and such information may be incomplete or condensed. Nor has the information and/or data been independently verified, and so is provided without further caveat regarding its reliability, suitability for commerce or specific purpose. 

This report does not constitute a prospectus and is not intended to provide the sole basis for an evaluation of the securities discussed herein. All estimates and opinions included in this report constitute our judgment as of the date of the report and may be subject to change without notice. Empire State Capital Partners or its affiliates may, from time to time, have a position or make a market in the securities mentioned in this report, or in derivative instruments based thereon, may solicit, perform or have performed investment banking, or other services (including acting as advisor, manager) for any company referred to in this report and may, to the extent permitted by law, have used the information herein contained, or the research or analysis upon which it is based, before its publication. Empire State Capital Partners will not be responsible for the consequences of reliance upon any opinion or statement contained herein or for any omission. This report is confidential and is being submitted to select recipients only. It may not be reproduced (in whole or in part) without the prior written permission of Empire State Capital Partners.

Any recommendations, opinions, forecasts, estimates or views herein constitute a judgment as at the date of this report. This document has been produced independently of Empire State Capital Partners and the recommendations, forecasts, opinions, estimates, expectations, and views contained herein are entirely those of the research analyst(s). While all reasonable care has been taken to ensure that the facts presented herein are accurate and that the respective recommendations, forecasts, opinions, estimates, expectations, and views are fair and well considered, none of the research analyst(s), Empire State Capital Partners or any of its directors, managers or employees has verified the contents of this document and, accordingly, no research analyst, Empire State Capital Partners or any of its respective directors, managers or employees shall be in any way responsible for its contents.