Ukraine: Ukrainian hryvnia falls amid ongoing political unrest
February 7, 2014
Anti-government protests flared up again last month, which triggered the resignation of Prime Minister Mykola Azarov and forced President Viktor Yanukovich to make concessions to the opposition. The protracted political crisis has begun to have a more notable impact on the country's weak economic conditions, especially on the currency.
The Ukranian hrvynia (UAH) has depreciated rapidly over the course of the last few weeks in spite of the financial aid Russia has offered. Russia bought USD 3 billion of Ukrainian bonds in December in an effort to avoid the country defaulting. However, against the backdrop of an increasingly uncertain political outlook, Russia decided to delay the next tranche, which increased the risk of a sovereign default yet again. As a result, the hrvynia came under increasing pressure, which forced the National Bank of Ukraine (NBU) to move the official exchange rate from 7.99 UAH per USD to 8.71 UAH per USD on 7 February. In addition, the Central Bank announced that the currency regime is moving from a crawling peg to a managed floating regime in which, "the official exchange rate should change every day."
The NBU hopes that a weaker currency will help the country improve its current account deficit by boosting the exports. Most analysts are skeptical, however, given that the Eurozone's recovery is still timid and that emerging markets have begun to slow down. That said, the current account deficit is expected to narrow this year since Russia reduced the price of gas in January. FocusEconomics Consensus Forecast participants expect the current account deficit to narrow from an estimated 8.6% of GDP in 2013 to 6.3% of GDP in 2014, which is down 0.3 percentage points over the previous month's estimate.
Against the backdrop of increasing political uncertainty, external imbalance and large public sector deficits, both Moody's and Standard and Poor's downgraded the country's credit ratings in the last two weeks from Caa1 to Caa2 and from B- to CCC+, respectively. Both agencies also revised down the country's outlook to negative.