* Cbank likely to exercise new powers soon - analysts
* Move means dollar peg may remain in place
* Hryvnia under pressure from widening trade gap
By Olzhas Auyezov
KIEV, Nov 6 Ukraine's parliament voted on
Tuesday to give the central bank legal powers to force exporters
to convert at least part of their foreign currency earnings into
hryvnias, indicating Kiev aims to keep its currency
pegged at current levels.
Other emerging market central banks have introduced forced
currency conversions, a partial form of capital controls, to
defend their currencies during crises, but such measures had
been eschewed by Ukraine since 2005.
The hryvnia has been under pressure recently, forcing the
central bank to intervene repeatedly to defend the peg, as
financial markets have bet the government will let the hryvnia
depreciate by 10-20 percent to boost exports now that national
elections held last month are over.
Analysts say forced conversions would make a hryvnia
depreciation less likely, at least in the short term. They would
support the currency by increasing foreign currency supply and
also help the central bank maintain its reserves, which have
been depleted by interventions.
"It is becoming pretty clear that the central bank is
planning to introduce even stronger capital controls on the
hryvnia," Citi analyst Luis Costa said.
"If the law is approved and the situation in the market does
not improve, the central bank might use this right in the near
future, in our view," VTB Capital said in a note.
The central bank asked parliament in August for the right to
introduce mandatory foreign currency sales for the first time
since 2005, but parliament only approved it on Tuesday after
speculation of a currency depreciation mounted since national
elections on Oct. 28.
The bank has not indicated when it might exercise its new
powers but may be hoping even the threat of such measures could
stem speculation on the currency.
"This might provide short-term support to the hryvnia
exchange rate, but would not address the hryvnia's fundamental
weakness, which stems from the widening of the external trade
gap, a tight debt maturity profile, and high devaluation
DEBT TARGET RISES
The hryvnia, which is pegged at around 8 to the dollar and
hit a three-year low of 8.19 per dollar this week, showed little
reaction to the vote in parliament. It was trading at 8.18 late
Non-deliverable forwards on Tuesday put the
hryvnia rate at 9.27/9.57 per dollar in six months and
10.21/10.61 in a year's time.
President Viktor Yanukovich's Party of the Region's claimed
victory in the election and the leadership on Tuesday blocked a
bid by the opposition, which says the vote was rigged, for a
The central bank has used market interventions to keep the
hryvnia trading at around 8 per dollar since early 2010 but
market players say the pressure for depreciation is mounting as
Ukraine's trade gap widens and its economy its being hit by
shrinking demand for its steel exports.
In a move certain to boost government debt, Ukraine's
parliament separately voted on Tuesday to increase the 2012
budget deficit by 7.68 billion hryvnias ($960 billion) to cover
gas and heating price subsidies for households.
The cost of insuring Ukrainian state debt against default
increased to 622 basis point on Tuesday from 614 bp on Monday,
according to financial information services company Markit.
The central bank's foreign reserves fell to $29.3 billion as
of Sept. 30, 2012 from $34.6 billion at the start of 2011.
The currency peg, backed by a tight monetary policy, has
also led to a credit crunch, compounding problems faced by
Ukraine which registered its first quarterly contraction since
2009 in July-September this year.
The bill adopted by parliament on Tuesday needs to be signed
into law by President Yanukovich.