Reuters POLL-Ukraine's FX reserves to fall further, adding to debt pressures - comments by Alexander Tkachev, Chief of investment analysis division of Analytical department, Pro-Consulting

The former Soviet republic's shrinking reserves have made creditors concerned about its ability to meet its debt obligations without International Monetary Fund support.

In June the reserves shrank to $23.2 billion, hardly covering three months of imports, from $24.5 billion, after the government repaid a $1 billion Eurobond without borrowing fresh money abroad. The poll predicts reserves will fall by 16 percent this year to $20.7 billion.  

"In August-December the government and the central bank must repay $4 billion in foreign-currency debt. If the government fails to refinance it, the money will be withdrawn from reserves," said Olexiy Blinov of Alfa Bank (Ukraine).

    Last month a central bank official said reserves would not fall any more this year because the government and central bank were taking measures to narrow the trade deficit [nL6N0FM2VE].

    Ukraine's foreign goods trade deficit shrank to $2.433 billion in the first five months of this year from $5.732 billion in the same period of 2012 as imports fell 12.7 percent year-on-year while exports fell 3.5 percent.

    But the trade gap will widen sharply in autumn when the country must increase gas imports to prepare for cold weather, according to the poll of analysts at 18 banks and brokerages.

    They say the reserves could fall as low as $18 billion in 2013 if energy market prices surge and Ukraine fails to secure financing from the International Monetary Fund.

    In 2011 Ukraine's foreign reserves, fueled by IMF loans, reached an all-time high of $38.4 billion. But the lender froze its $15 billion stand-by programme with Ukraine after Kiev reneged on commitments to raise domestic gas prices. The programme expired last December.

    A major part of Ukraine's debt must be repaid to the IMF his year and next year. In the first half of the year the country returned about $2.8 billion and a similar repayment is scheduled for the second half. In 2014 Ukraine will get a $3.6 billion bill from the IMF. 

    Ukraine and the IMF launched talks early this year to nail down a new aid package, but the Kiev government has found alternative lending sources on external markets and has indicated it does not require fresh IMF funds yet.

    In February and April Ukraine placed two Eurobond issues worth $2.25 billion that helped refinance repayments to the IMF. International investors were keen to buy the high-yielding debt using cheap funding pumped out by the Federal Reserve to stimulate the U.S. economy.  

    But since then the Fed has signalled an eventual change in policy and yields for Ukraine's debt have risen significantly as investors refocus on individual countries' problems.

    "The current situation on external markets shows that the possibility of refinancing debt is very low," said Erik Nayman of Capital Times.

    This week the IMF said that Ukraine must participate in post-programme monitoring, which could be a sign that the Fund is also worried about Ukraine's ability to pay back $8 billion owed to the IMF at the end of June.  

    Lenders and investors have called on Ukraine to resume cooperation with the IMF and tackle corruption in order to attract more foreign investment.

    In order to repair its relationship with the IMF, Ukraine would need to accept long-standing recommendations to raise household energy bills, which it currently subsidises heavily.

But analysts polled by Reuters doubt the government would agree any time soon, given that campaigning for the 2015 presidential election will start towards the end of next year.

    President Victor Yanukovich, seeking a second term, has promised to keep consumer prices and the hryvnia exchange rate stable.

    "The government has low chances of borrowing enough on the markets to repay debts. That is why it will be forced to turn to administrative measures in order to curb local demand for foreign currency and increase supply," said Anatoly Baronin of the analytical group Da Vinci.

    The central bank, which at the end of last year forced exporters to sell 50 percent of their foreign-currency revenues, can increase the proportion to 75 percent, said the analyst.

    He and other analysts see new taxes on foreign currency exchange transactions and foreign currency deposits among possible administrative steps to limit demand.

    Below are forecasts for the foreign currency reserves, GDP, the hryvnia and other economic indicators for Ukraine: 

    Reuters polled analysts this week at Alfa Bank (Ukraine), Capital Times, CASE (Ukraine), Concorde Capital, Credit Rating, Da Vinci AG, Dragon Capital, Investment Capital Ukraine, Interbusiness Consulting, International Centre for Policy Studies, Prominvestbank, Institute for Economic Research and Political Consulting, Raiffeisen Bank Aval, First Ukrainian International Bank, Credit Agricole Bank Ukraine, UkrSibbank, Pro-Consulting and Altana Capital.