Ukraine Market Report — Q4 2008
The currency lost around forty percent of its value, industrial output fell by a quarter, and an emergency financing programme was agreed. The quarter is the sharpest single contraction in the country's independent history.
Overview
The central bank could no longer hold the exchange rate and the hryvnia depreciated sharply, losing around forty percent of its value against the dollar within weeks.
Industrial output fell by roughly a quarter year on year. An emergency financing programme was agreed with the International Monetary Fund in November.
What happened to the balance sheets
The devaluation transferred wealth on a scale no fiscal measure could match, and it did so automatically.
A household with a dollar mortgage and hryvnia income saw its debt rise by the full amount of the currency move, overnight, with no change in its ability to pay. Large numbers of those loans stopped performing immediately.
Companies with foreign-currency borrowing and domestic revenue faced the same arithmetic. Companies with export revenue and foreign-currency debt were hedged naturally and came through comparatively well — the clearest possible demonstration of why currency matching in the structure of a business is worth more than any financial hedge.
Banks absorbed the losses of the first two groups.
The policy response
The IMF programme provided external financing, which prevented a disorderly default and a complete banking collapse.
Its conditions required exchange rate flexibility, bank recapitalisation and fiscal consolidation. The first was already a fait accompli, the second was executed partially, and the third was politically impossible in the run-up to a presidential election.
Sectors
Metals and chemicals — output collapse. Some plants never reopened.
Construction — effectively stopped.
Banking — several institutions resolved or nationalised; deposit outflows severe.
Agriculture and food processing — the resilient sectors, with the devaluation improving export competitiveness immediately.
Retail — sharp contraction in durables, relative stability in food.
What the quarter settled
That the 2004–2008 growth model was over, and that its ending was not caused by any Ukrainian decision made in 2008.
The decisions that determined the severity were made in 2005, 2006 and 2007 — to lend in foreign currency to unhedged borrowers, to fund long assets with short liabilities, and to leave the exchange rate fixed while imbalances accumulated behind it.
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