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Thursday, May 22, 2008

Monetary Chaos Breaks Out at the Ukraine Central Bank

Does anyone happen to know offhand the "official" dollar rate of the Ukrainian currency, the Hryvnia? I am asking this question since clearly over at the central bank they are having difficulty deciding at the moment, since - like the legendary character Hydra - they seem to be speaking with two "heads" at the same time, and the only question I can ask is: would the real representative of the Ukraine central bank please stand up!

This issue unfortunately is neither a small nor a comic one, since Ukraine is currently running a 30% plus annual inflation rate, and letting the currency rise against the dollar is one of the few serious anti inflation policies anyone has on the table at the present time.

Essentially the story to date is that the Ukraine central bank had been keeping the "official rate" for the national currency - the Hryvnia - at 5.05 to the dollar (within a broader target band of 4.95-5.25) since August 2005 - although traders have generally been saying that the bank effectively stopped intervening around February-March. However during the last 24 hours the "official rate" has become a highly contested issue, with one part of the bank's monetary policy structure suggesting that the official rate has now been revalued to 4.85 to the dollar, while another part is denying this and maintains the rate is still 5.05. Basically one part of the structure is challenging the right of another to take decisions.

Of course the reaction of the financial markets to this state of affairs is not that hard to predict (at least in the immediate term), and Ukraine's hryvnia fell the most against the dollar in a single day in over eight years yesterday, falling 4.01 percent on the day to trade as low as 4.7875 per dollar by 6:04 p.m. in Kiev, down from 4.5550 late Wednesday, making it the worst performer among the 178 global currencies being tracked by Bloomberg yesterday.

The fall at this point may, however, be more part of the internal tussle which is taking place in the bank itself than any knee-jerk financial markets reaction (although that could well be to come as central bank credibility at this point must be tending towards zero), and a according to Agata Urbanska, an emerging-markets currency strategist in London at ING Bank "They (the central bank, or part of it) are back in the market................This is all about the central bank weakening the currency.''


The latest incident is only one more episode in a long term tug-of-war which has been going on inside the central bank (and of course, inside the Ulraine parliament itself, since, it will be remembered, President Viktor Yushchenko was recently physically prevented from giving his state-of-the-nation address before parliament by legislators loyal to Prime Minister Yulia Tymoshenko who blocked access to the speaker's chair). The immediate problem started on Wednesday when Ukraine`s central bank board (note here the key term board) announced that it had decided to strengthen the official rate of the hryvnia to 4.85 to the dollar from the previous level of 5.05.

This move was not entirely unexpected since the bank has been under constant pressure to revalue or liberalise the hryvnia since inflation began rising dramatically in the autumn of last year, and Central Bank Governor Volodymyr Stelmakh had announced back in late April that there would soon be a "move" on the exchange rate front. However in a statement which now assumes rather more significance than it did at the time, the bank`s council (yes, note the COUNCIL - not the board - since the council is the other main player in this game) explicitly repudiated Stelmakh and rejected the idea of broadening the band on the very same day. From that moment on it should have been clear that monetary policy at the Ukraine National Bank was in for a bumpy ride, and so it has been.


Not to be upstaged by the decisions of the Board, Ukraine's central bank council itself met yesterday and formally rejected the hryvnia revaluation which had been decided on by the bank's board only one day earlier, and issued a press release stating that the official rate still stood at 5.05 to the dollar. This was the first example of one body vetoing another since the bank was founded when Ukraine became independent in 1991.

The bank council has 14 members, including the governor, parliamentary speaker Arseniy Yatsenyuk, and a number of parliamentary deputies. Stelmakh himself abstained at yesterday's vote while the other members all backed the veto of the board's decision.


"Today, the action of the board of raising the official rate to 4.85 was rescinded. Therefore, the official rate stands at 5.05/$," Petro Poroshenko, the council's head, told a news conference after a council meeting. He also advised the bank's board to re-examine the issue on Friday and suggested the board could only overturn the council's decision with a two-thirds majority.


Now for those of you who are - like me - a little bit confused by this somewhat Byzantine institutional structure, perhaps I should make plain that the board is effectively the bank's executive, while the council is a body created to formulate a framework for ongoing monetary policy. But now we find the board hold that the hryvnia is valued at 4.85 to the dollar, while the council maintain that the "official" value is still 5.05. So which is it? Well at this point your guess is as good as mine - and this is certainly "pluralist" monetary policy in action - but the board do seem to want to insist that they are going to have the last word, since late last night Reuters reported that the board had decided to overturn the councils veto and had issued a statement saying the hryvnia's rate on Friday would stand at 4.85 to the dollar -- unchanged from the rate it had set for Thursday, revalued from 5.05, before the council imposed its veto.

The Ukraine parliament - the Verkhovna Rada - have however voted to summon central bank of head Volodymyr Stelmakh to give an explanation of his actions (by 382 votes out of a possible total of 447) following a proposal put forward by the parliamentary groups of the Party of Regions, the Block of Lytvyn, BYuT, and CPU.


Anyway, I do know how many of you are able to follow all of this? Personally my head is already whirling. And the whole situation became even more bizarre late last night when central bank officials declined to comment on whether the board had in fact overturned the earlier council veto decision, effectively sidestepping the problem posed by head of the council Petro Poroshenko earlier in the day when he stated only a two-thirds vote on the board could do this.


Basically the background to all of this is that until recently, the central bank had been intervening regularly, buying and selling currency to maintain the hryvnia within a prescribed tight-corridor of 5.0-5.06. As a rseult the hryvnia had been hovering around 4.7-4.8 since the central bank stopped intervening in February-March, but in recent days it had begun to soar, touching at one point 4.6 to the dollar, following comments from various central bank officials indicating a revaluation was coming soon, and pressure from credit ratings agencies and multilateral bodies like the IMF to allow the currency to rise in an attempt to soak up some of the globally imported inflation.

Earlier this week a rapid (and possibly speculative) surge in demand took the market rate to 4.6 leaving a gap of about nine percent between the interbank and the official rates, leading the bank`s deputy chairman, Oleksander Savchenko, to state on Monday that decisions would be taken "in the next few days" to tackle the hryvnia`s "highly volatile rate". Effectively it was the developing gap between the official and the interbank rates which precipitated the move on the part of the bank BOARD.


So the problem here is inflation and what to do about it. Ukraine's inflation rate was once more up sharply in April - passing the threshold of the 30% annual rate - as the bickering continued between Prime Minister Yulia Tymoshenko's government and the office of President Viktor Yushchenko over economic policy and how to handle the problem. Inflation was up 3.1 percent month on month (running at an incredible 37.2 annualised rate), and although this was lower than the 3.8 percent monthly increase registered in March (which was a 9-year record) it was still far higher than most analysts were expecting.

Annually, inflation reached a huge 30.2 percent - aided by an almost 50 percent jump in food prices - and the cumulative price rise for the first four months of this year was 13.1 percent, a 'mere' 3.5 percentage points above the government's whole year 2008 target of 9.6% which the government has yet to revise.





The Ukraine central bank has been trying to soak up hryvnia liquidity since the start of the year, twice raising the refinancing rate (which is now at 12 percent, up from 8 percent at the end of last year) and issuing a large amount of depository certificates.

The bank has also repeatedly said that it sees a strengthening of the hryvnia as a means to combat inflation. And of course the bank has been under continuing pressure to revalue or liberalise the hryvnia after inflation began to accelerate in the middle of last year.

When the decision to change the official rate was announced by the board on Wednesday the ratings agency Standard and Poor`s immediately called the move a step towards curbing price rises.


"Liberalising the exchange rate regime should help to curb inflation of tradeables, and in particular commodities such as gas and food, which are priced in dollars," the agency said in a statement. It has currently a rating of BB- for Ukraine.


However ones the smoke finally clears on all this we will be left with a number of outstanding questions. Not least of these is whether in the mid term the hryvnia is not more likely to move DOWN than up. Certaily Ukraine's economic problems are now substantial ones. This was explicitly recognised by Standard and Poor's in its comments following the decision by the bank`s move board, and they painted a bleak picture for Ukraine, saying inflation was boosted by non-monetary factors and that a stronger hryvnia would ultimately harm exporters, raising the current account deficit.

"In the first quarter of 2008, nominal government expenditures increased just under 50 percent, pushing up public sector wages and sending a highly inflationary signal to the private sector," it said. "Loose income policy continues to affect goods prices via second-round effects."


The agency also lambasted the government of Prime Minister Yulia Tymoshenko in January, calling its fiscal policies "populist" after it began paying compensation to people who`s Soviet-era savings were wiped out by hyperinflation during the 1990s.

Tymoshenko has repeatedly promised that the government would be able to bring inflation under control in just a few months, and some officials had even predicted deflation during the summer months due to bumper food harvests (which are more than possible, the harvests, not the deflation, and this may mean in the short term that economic growth and inflation only accelerate).

Meantime Ukraine is currently running a current-account deficit, a deficit which has widened to $4 billion since the beginning of the year, and many analysts estimate it may exceed $15 billion by year-end. In fact the IMF estimate that it will reach 7.6% of GDP this year.




Conclusion

By way of conclusion I would like to make three simple points about this strange affair. The first of these is that the situation in the Ukraine to some extent parallels the situation in Russia, since both countries are facing a major inflation problem, and both are under pressure to allow the currency to rise to soak up some of the inflation. The political battle in Ukraine also mirrors the one in Russia in this sense, since the Putin/Medvedev group have been making it quite clear that they favour going for growth over the need to tackle inflation, and thus will resist currency revaluation pressures, even though the inflation itself will at some point almost inevitably undo all this solid growth performance due to the instability which will eventually follow, as I attempt to explain in this post.

The second point would be that the ability of simple currency appreciation alone to handle the kind of overheating Ukraine is experiencing is in fact rather questionable. Basically letting the currency appreciate can soak up some of the global dimension in Ukraine inflation, but it will not in and of itself resolve the internal overheating dimension. Ukraine, like Russia, has a declining population and a declining working age population. Unlike Russia Ukraine has out-migration and not inward migration. This means that the labour shortage issue in Ukraine is expecially acute when growth is in the 5 to 7% pa range. Basically Ukraine does not have the human capital resources to grow this quickly, and having a steady stream of remittances from those working abroad fueling consumption and construction only adds to (and does nothing to help resolve) these underlying problems.

Lastly, it is clear that Ukraine is now locked in to some sort of "boom-bust" cycle, but the bust may well not be imminent: that is to say we may well go up further before we finally fall back to earth. The reason for this is the current high in wheat prices, and the fact that Ukraine may well have a bumper harvest this year.

Economic analysts (and CEE specialists) 4Cast are predicting a significant recovery in agricultural performance across the entire East European region this year, driven by a massive rise in crop yields and farming output. They say weather conditions seem favourable in many countries in the region. Gábor Ambrus, analyst at 4Cast in London. believes the effect will be most visible where the share of farming is high, i.e.: Ukraine and Romania, while Poland, for example, may not benefit especially as it was spared from much of the regional draught in 2007.

Ambrus sees Romania and Ukraine as particularly likely to benefit from an agricurally driven boost to headline GDP effect. (The share of Romanian agriculture in GDP is 7-8%, so even a 30% increase in farming output may boost GDP by 2pp above expectations.) The effect on Ukraine is even larger with agriculture having something like a 17-18% share in GDP. The crop estimates being offered by UkrAgroConsult indicate a 35% increase in crops, and this could boost GDP by as much as 6pp over 2008, offsetting much of the slowdown coming from other sources, Ambrus argues. Of course this estimate may well be on the high side, but nonetheless Ukraine should get a substantial GDP boost, which means we should watch out, since this train may well now be about to accelerate before coming to what looks like it will inevitably be a "sudden stop".

Anyone interested in a rather fuller explanation of the underlying human capital resource problem could do worse than read this post I wrote some months ago on the topic.

Update

Well it is less than an hour since I put the post up, and already I am updating. I suspect this may happen more than once in the coming days. The latest news is that - unsurprisingly - Ukraine`s central bank chairman Volodymyr Stelmakh publicly confirmed this morning the bank's change in the official hryvnia rate to 4.85 per dollar from 5.05. The show goes on.



“The bank’s board made decision to confirm the change of the rate. We are confident that we do everything right, and we will defend our position”, V.Stelmakh said. According to him, the bank`s council had no right to decide on economic or legal issues and he saw the bank`s change of the official rate as merely eliminating imbalances in the market, and based on economic factors, rather than a "revaluation".

Monday, May 19, 2008

ERDB Report and the Hryvnia Band

The European Bank for Reconstruction and Development this weekend cut its growth forecasts for Ukraine, Kazakhstan, and Romania. More than the cut itself, what was perhaps more important were the reasons given. The EBRD warned that Kazakhstan was suffering from 'the impact of inflation and credit stagnation' and reduced expected gross domestic product growth from 8.5 to 5.1 per cent. In Romania's case the growth forecast was cut from 6.5 to 5 per cent, on the grounds of 'rapid monetary tightening', with the central bank raising interest rates to counter inflation.For Ukraine, the growth forecast was reduced from 6 to 5.5 per cent, as the EBRD warned of the impact of inflation which last month hit an annual rate of 30 per cent, the highest in Europe and indeed among the highest globally at this point.

In a move which is possibly related to the ERDB report Ukraine central bank Deputy Governor Oleksandr Savchenko said this morning - at the meeting organised by the ERDB in Kiev - the central bank may have to change its policies to cut the inflation rate to its current target of between 18 percent and 19 percent this year (after it soared to 30.2 percent in April). This is being widely interpreted as meaning that the Ukrainian central bank may allow the hryvnia to trade more freely against the dollar - possibly as soon as this week - in an attempt to cap inflation after it accelerated to the fastest pace in more than a decade last month. The central bank has been effectively controlling the national currency since 1998.



The hryvnia has so far gained 5.1 percent this year in interbank trading amid speculation the Natsionalnyi Bank Ukrayyny has abandoned its practice of buying and selling the currency to keep it steady against the dollar.

Monday, May 12, 2008

Ukraine Inflation April 2008

Ukraine's inflation rate was once more up sharply in April - passing the threshold of the 30% annual rate - as the bickering continued between Prime Minister Yulia Tymoshenko's government and the office of President Viktor Yushchenko over economic policy and how to handle the problem. Inflation was up 3.1 percent month on month (an incredible 37.2 annualised rate), and although that was lower than the 3.8 percent registered in March (which was a 9-year record) it was still higher than most analysts were expecting.

Annually, inflation reached a huge 30 percent - aided by an almost 50 percent jump in food prices - and the cumulative price rise for the first four months of this year was 13.1 percent, a 'mere' 3.5 percentage points above the government's whole year 2008 target of 9.6% which the government has yet to revise its 2008.




The Ukraine central bank has been trying to soak up hryvnia liquidity since the start of the year, twice raising the refinancing rate (which is now at 12 percent, up from 8 percent at the end of last year) and issuing a large amount of depository certificates. It has in recent weeks started to allow the hryvnia to strengthen outside a previous strictly kept band of 5.00-5.06/$ and beyond a wider target of 4.95-5.25 (although the bank still maintains that the broader band remains in place).

All of this however is far too little far too late. With inflation running at 30%, even 12% interest rates are far from sufficient (since there is still a negative 18% incentive to borrow against inflation). The figures thus simply add to the pressure on the National Bank of Ukraine to take stronger action, from further hikes in key interest rates to letting the hryvnia appreciate rapidly against the U.S. dollar.

“We are standing at the threshold behind which the NBU would let the hryvnia
half free float within the [currency trading] band,” Iryna Kryuchkova, a deputy
economy minister, said in an interview with Kontrakty newspaper. “There is no
other way out. Everyone understands that.”


The NBU met on April 24 to consider the idea of letting the hryvnia appreciate against the dollar, but decided to postpone the matter indefinitely. And it isn't only consumer prices which are causing concern, producer prices were up at a 37.6% annual rate in April, suggesting that there is still plenty of fuel left in the inflation pipeline, and that the fire is still set to burn for some months to come.




Part of the problem which existis in addressing the inflation issue is the level of in-fighting in the government itself, with Tymoshenko under constant criticism from the Yushchenko camp, the present government's better known policies have included raising wages and social benefits and paying compensation for lost Soviet-era savings. Budget finances - which the government has yet to amend despite having set themselves a March deadline to do this - are currently uncertain as most of the privatisation plans which are potentially worth billions of dollars have been suspended by Yushchenko.


The economy - which has been growing in the 6% to 7% annual rate in recent quarters -continued to grow in the first quarter of 2008 (at a 6% year on year rate) but it is obvious the economy is now slowing (although a bumber harvest expect for 2008, and high wheat prices, may give the headline number a little 'bounce' as we move forward).





Foodstuffs constitute about 50-60 percent of the Ukraine CPI basket and in March they were up by 5.6 percent month-on-month, with a 14.4 percent rate over the first quarter. The ministry reported that bread in April alone grew 1.2-2.9 percent, flower 3.6 percent, rice 18.2 percent, beef 13.4 percent, chicken meat 3.5 percent and sausages 7.2 percent.


Some prices did fall back however - egg prices were down 5.9 percent, sunflower oil 4.1 percent, sugar 2.3 percent, milk 1.1 percent and cream 1.2 percent.


The poor 2007 harvest continues to exact a toll on agriculture and food processing industry performance. Over the first three months of the year, agriculture reported a meager 0.4% year on year increase in value added. Output in the food processing industry grew by 10.3% year on year over the period, slightly accelerating from 10% year on year growth in 2007.

The acceleration in food prices is largely the result of strong food demand (see this post here for a much more detailed explanation of all this), both domestically and externally (food exports were up by 52% year on year in January-February 2008), while shortages of some agricultural products on the domestic market were partially compensated for by growing imports (particularly livestock products and vegetables).

High grain and forage prices explain the continuing reduction in the Ukraine livestock population (cattle and pig stock declined by 10.5% year on year and 17.7% year on year over the first two months of the year, respectively), and this slaughter of the livestock population lead to an increase in the output of meat and meat products.

In the short term the agricultural situation may be about to improve, since economic analysts (and CEE specialists) 4Cast are predicting a significant recovery in agricultural performance across the region this year, driven by a massive rise in crop yields and farming output.

They say weather conditions this year are favourable in many countries across the region. Gábor Ambrus, an analyst at 4Cast in London believes the effect will be most visible where the share of farming is high, i.e.: Ukraine and Romania, while Poland slightly may not benefit especially as it was spared from much of the regional draught in 2007.

He sees Romania and Ukraine as particularly likely to benefit from this effect. (The share of Romanian agriculture in GDP is 7-8%, hence even a 30% increase in farming output (may boost GDP by 2pp above expectations.)

The effect on Ukraine is expected to be even more pronounced with agriculture having something like a 17-18% share in GDP. The crop estimates of UkrAgroConsult indicate we coupd see something like a 35% increase in crops, and this could boost GDP by a quite significant value over 2008, offsetting much of the slowdown which coming from other sources, according to Ambrus' forecast.

Apart from food, the current inflationary wave has undoubtedly been fuelled by very strong wage rises across the economy, wage rises which are undoubtedly partly produced by the fact that - after years of low fertility and strong outward migration - Ukraine's "fit and available" domestic labour supply is strongly constrained. This has put a strong upward pressure on wages, given the vigorous expansion the economy has seen, but as inflation has accelerated this has started to burn strongly into the real values of those increases, and while it is still too early to call really, the chart below does seem to be indicating that the wave is now begining to lose momentum.



Loose monetary conditions as well as large private sector borrowing from abroad have given rise to rapid increases in commercial bank credit, which have averaged a 70% per annum growth rate over the last three years. In January 2008, commercial bank credit portfolios were up by an extraordinary 78% yoy. High loan growth rates were reported for both corporations and households.

Annual growth in loans to households grew at a faster pace than those to the corporate sector. In 2007, bank credits to households grew by 98% yoy. In just two years, their share of total credit has grown from around 25% at the end of 2005 to 37.6% at the end of 2007. Almost 70% of all household loans were for immediate consumer purposes, and the high growth rate in these consumer loans has undoubtedly contributed to strong consumption growth and thus added to inflationary pressures.

At the same time, the measures the NBU has been taking since the end of 2007 to contain rapid credit growth (as a key part of their strategy to reduce aggregate demand and thus tame inflation) have now started to bear fruit, and the expansion in bank credit has been slowly but steadily losing speed, increasing at a 76.1% year on year rate in March, down from 78% year on year in January.


The combined impact of the NBU`s tightening of reserve requirements and capital adequacy norms in November 2007, the rise in the discount rate by 400 base points to 12% since the beginning of 2008, the sizable sterilization operations (since November 2007, NBU has absorbed about $12 billion of excess liquidity),and the impact of the global liquidity tightening, all of these have meant that pressure on consumer credit has been mounting, and we are now see the consequences.

At the same time, a significant proportion of domestic credit is in non-hryvnia denominated loans. The strong inter-bank competition which has existed following the entry of a number of foreign banks into the Ukrainian banking system in the last two years has only aggravated the situation here. The attraction of such loans is, of course, that they are much cheaper than the hryvnia denominated ones, and with all the talk being of a coming upward revaluation in the currency, short term currency risk may be seen as slight. Should however the Ukraine economy come in for a hard landing at some point, and should this hard landing be accompanied by a sharp downward adjustment in the value of the hryvnia (which might well be anticipated following all the inflation) the situation would be rather different, and household distress and non-performing loans could become a serious problem. The increase in the cost of hryvnia denominated loans from a weighted average credit rate of 13.9% in January to 15.2% pa in March 2008 compares with the rate on on forex-denominated loans which still stood at 10.8% pa in March 2008 (which was up slightly compared with February but still down on January 2008 and December 2007 which were 10.9% pa and 11.2% pa respectively.

Another disturbing feature of the current Ukraine situation is the existence of a trade deficit. Gooods exports were up by a strong 28% year on year in the first quarter, underpinned by a 26.5% yoy increase in the export of metallurgical products, 20.2% yoy in chemical goods, and about a 45% yoy increase in agricultural and food commodities. Export of machinery and transport vehicles recorded impressive 53% yoy growth.

However, continuing high growth in domestic demand, surging energy and raw material prices, and rising transportation costs caused even higher growth in imports. In particular, CIF merchandise imports grew by almost 35% yoy.

On a positive note, capital goods amounted to about 17.5% of total merchandise imports. In addition, intermediate goods hold another significant share in imports, suggesting that the widening trade deficit was partly investment-driven.

Driven by sharp deterioration of the merchandise trade deficit, Ukraine`s current account deficit widened to $5.9 billion in 2007, representing 4.2% of GDP. Despite the widening CA gap, the strong capital inflow allowed for not only covering the gap but also replenishing international reserves.

According to BoP data, the net FDI inflow amounted to a record high $9.2 billion, partially thanks to a number of acquisitions in the banking sector and food processing.

Moreover, despite global financial turbulence, Ukraine received $5.75 billion of portfolio investments in 2007, while its external private debt grew by more than 70%. As a result, the financial account surplus (analytical representation of balance of payments) reached 11.2% of GDP, which allowed the NBU to raise its international reserves to $32.5 billion, a level sufficient to cover more than 4.5 months of future import of goods and services.

Buoyant growth of world steel and food prices promises another year of robust export growth for Ukraine in 2008. However, export performance was somewhat disappointing in January as it reported a rather moderate 14% yoy increase.

The slowdown should be primarily attributed to slower growth in metals exports, the weightiest component of Ukraine`s exports. Accounting for about 42% of total merchandise exports, metallurgical products exports grew by a meager 1.8% yoy in January, which was closely related to poor metallurgical industry performance at the beginning of the month.

Fitch Lowers Ukraine Rating

Fitch Ratings has lowered its outlook for Ukraine's credit ratings to stable from positive as inflation surges upwards. Fitch confirmed the foreign and local issuer default rating at BB-, three steps below investment grade.

Ukraine is the biggest former Soviet republic with credit ratings below investment grade, a legacy of political instability and delays in selling state assets.

Fitch has also lowered its outlook for nine Ukrainian banks, following the reviewed outlook for the whole country. The banks include Ukraine's biggest private lender KB Privatbank, the state-run Oschadbank, the State Export-Import Bank of Ukraine as well as Swedbank, BNP Paribas, Commerzbank and UniCredit's Ukrainian units.


``Ukraine's recent strong macroeconomic performance faces growing risks from accelerating inflation and a rising current- account deficit,'' Andrew Colquhoun, the director of Fitch's Sovereigns Group, said today. ``An uncertain policy response is not convincingly mitigating the near-term risks facing the economy. A clearer anti-inflationary strategy from the authorities would be positive for the ratings"



Ukraine's April inflation rate jumped to 30.2 percent, the highest since January 1997, as global food prices surged and the government increased social spending. The government pledged to cut the annual rate to 9.6 percent this year from 16.6 percent a year ago. The International Monetary Fund forecast an inflation rate of 17.2 percent for this year.


Fitch forecasts Ukraine's current-account deficit will rise to 7.5 percent of gross domestic product in 2008, compared with 4.2 percent a year ago. It projects the country's gross external financing needs, including short-term debt, at 136 percent of reserves in 2008.