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Ukrainian hryvnia seen weakening to five-year low without IMF support: Reuters poll

KYIV (Reuters) - Ukraine’s hryvnia is likely to weaken to 29 per U.S. dollar by the end of the year, the lowest level since 2015, because of delays in loans from international partners, a Reuters monthly poll showed on Tuesday.

Analysts polled by Reuters believe that foreign outflows from local bonds and higher government spending on social security amid an economic decline would add more pressure on the currency, resulting in it losing about 18% of its value in 2020.

The hryvnia, which started the year at 23.7 to the dollar, has already slipped to 28.3.

The government repaid more than $2 billion in external debts in September but did not receive an expected $700 million from the International Monetary Fund under its $5-billion stand-by program, because of the IMF’s concern at the lack of progress in Ukraine’s anti-corruption reforms.

The European Union and the World Bank have also postponed disbursements of 600 million euros and $350 million respectively.

The loans were aimed at supporting financial stability in the country, whose economy plunged 11.4% in the second quarter, amid a lockdown imposed to curb the spread of the coronavirus.

The prospects of Kyiv unlocking the aid are uncertain.

“Factoring in exaggerated devaluation expectations, domestic consumption recovery, expected worsening global conjuncture, unsupportive capital flows, and a surge in fiscal spending, we project the hryvnia to depreciate by the end of the year to 29-30/$1,” analysts from ICU brokerage said in written comments.

The median forecast of analysts polled by Reuters suggests annual inflation of 4.6% year-on-year by the end of 2020 from 2.5% in August, due to the weakening currency. Inflation is seen rising to 5.6% in 2021.

“The risk of further devaluation of the hryvnia, rising energy prices, and recovery of consumer and investment demand ... will contribute to the acceleration of the average inflation rate,” analysts of Raiffeisen Bank Aval said.

Last year, the hryvnia strengthened by 17% and the central bank boosted its currency reserves by almost $4.9 billion thanks to foreign investments worth $4.7 billion into Ukraine’s local bonds. The country also earned from its record volume in grain exports.

Foreign investors’ portfolio has shrunk by $1.7 billion so far in 2020. The government expects that grain exports will fall 17% this season due to a lower harvest.

Reporting by Natalia Zinets; Editing by Alexandra Hudson

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