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Ukraine: Experts Express Confidence In Hryvnia Stability

Kyiv, 15 May 1998 (RFE/RL) -- This week's European Bank for Reconstruction and Development (EBRD) meeting in Kyiv heard assurances by Ukrainian government officials, all positive -- and, some say, questionable.

Deputy Prime Minister Serhy Tyhypko expressed confidence he would succeed in pushing the latest round of reform legislation through the new Parliament by appealing to new deputies' sense of patriotism.

At the same time, National Bank of Ukraine (NBU) Governor Viktor Yuschenko flatly stated that the hryvnia would stay within its currency corridor until the end of 1998.

Some financial observers agreed.

"The critical period will come this Summer," said Intar Invest Currency Trader Oleg Mukhamidov. "But I think the NBU will be able to keep its promise."

"It looks like the exchange rate will hold," said Woodcommerz Economist Patricia Bartholomew. "I don't believe we will be in any danger through the end of the year."

The hryvnia continues to trade at about 2.04 to the U.S. dollar. Six months of stagnant stock markets, negative political results, the Asian crisis and growing Treasury bill redemptions left it essentially untouched. In spite of a further crunch expected in August, when one-year Treasury-bill (T-bill) redemptions peak, financial professionals tell RFE/RL that, barring unforeseen disasters, 2,000-million dollars in current NBU reserves -- combined with new issues -- will be enough to cover $1.8 billion in T-bill repayments due through the end of 1998.

The Deputy Chairman of the Board of the Austria-based bank Creditanstalt Ukraine, Harald Vertneg says he believes, the situation in Ukraine right now has real parallels with the situation in countries like Hungary and the Czech Republic, where everything was fine and then you had a devaluation over night.

In fact, some of the parallels between 1994 Hungary and 1998 Ukraine are striking. Domestic political commitments forced both countries to run deficits, which both Kyiv and Budapest covered by issuing government bonds. A subsequent austerity program in Hungary led to devaluation, and some analysts say the same is in the offing for Ukraine.

"The hryvnia is overvalued," says Creditanstalt's Vertneg. "It must fall at least somewhat."

Atlantik East Director of Training Stanislav Coufal predicts a 20 % devaluation -- in a worse-case scenario.

That is what happened in Hungary -- although the technique was different. In Hungary, the national bank engineered an effective 20 percent devaluation between September 1994 and March 1995. A narrow intervention band has kept the forint stable and Hungary's current-account balance solidly positive.

"But one thing you have to remember," pointed out CS First Boston Budapest Chief Economic Analyst Istvan Racz, "is that Hungary has been the recipient of about half of the foreign direct investment (FDI) in all of East Europe."

Experts say Ukraine must attract foreign investment for long-term stability of the hryvnia. Most agree that stability of the hryvnia depends on the NBU's ability to steer a safe course through the next six months of likely stormy finances, and Ukraine's ability to attract international support.

Meanwhile, company officials this week said the Austria-based bank, Creditanstalt International AG, hopes to continue to act as a major channel for EBRD funding for Ukraine. Creditanstalt currently handles 14 percent of total EBRD financing, the highest amount of any commercial bank. Bank managers tell RFE/RL that a similar percentage of about $300 million in loans and grants recently released to Ukraine will be handled by the company, as well.

The EBRD has 18 major projects in Eastern Europe under Creditanstalt management. Projects are concentrated in the power supply and telecommunications sectors.

In Ukraine, the company currently advises the State Property Fund on the Donbassenergo privatization and the Lviv city government on a municipal bond issue. The company is also involved in five EBRD projects, two in Russia and one each in Uzbekistan, Hungary and Slovenia. Projects include a toll highway, supermarket chain and nylon manufacturing factory.

The company has bank offices in Croatia, the Czech Republic, Hungary, Poland, Russia, Slovakia and Slovenia. And, Creditanstalt plans to open its Ukraine branch office this Summer.