Ukraine C/A deficit increases 11% in 2017 on weak December

Ukraine’s current account (C/A) fell to a USD 690 mln
deficit in December from November’s surplus of USD 28 mln, the National Bank of
Ukraine (NBU) reported on Jan. 31. Swelling by 65% yoy, December’s result was
the second worst in 2017. A slight increase in secondary income surplus (USD
387 mln vs. USD 351 mln in Dec. 2016) was offset by enlarged deficits in the
trade balance (to USD -892 mln vs. USD -689 mln a year
ago) and primary incomes (USD -185 mln vs. USD -79 mln a year ago).

The biggest factor in the growng trade deficit was
goods exports dropping 7.3% m/m. Falling output of agricultural produce caused
food exports to decline 8.1% m/m. Meanwhile, goods imports increased 2.8% m/m.
While the import of mineral products (which mostly entails energy imports)
dropped 5.4% m/m, strong investment demand pushed machinery imports to 11.1%
m/m growth.

In full year 2017, Ukraine’s C/A deficit was USD 3.8
bln, which is 11.2% higher yoy (in 11M17, the deficit narowed 2.3% yoy).

The financial and capital accounts rose to a USD 713
mln surplus in December from USD 473 mln in the prior month (USD 780 mln a year
ago). The main source of the surplus was FDI rising to USD 233 mln from USD 169
mln in November (USD 20 mln a year ago). An increase in long-term loans
attracted by the non-banking sector (USD 266 mln inflow from USD 215 mln
outflow in November) also contributed to the positive financial balance.

Outflow of individual cash from the banking system
fell to USD 64 mln in December from USD 93 mln in November.

The two sides of the general balance (C/A vis-a-vis
capital and financial accounts) almost evened out in December, leading to a
surplus of USD 1 mln (compared to a USD 491 mln surplus in November and USD 359
mln a year ago). The negligible BoP surplus added little to the currency stock
needed to cover Ukraine’s payments in December.

The currency inflow of USD 589 mln received mostly
from FCY-denominated state bond placements in December was not enough to cover
currency outflows of USD 424 mln in FCY-denominated state debt, USD 162 mln in
payments to the IMF and USD 183 mln in net currency intervention on the
interbank market. As a result, the central bank’s international reserves
dropped 0.6% m/m to USD 18.8 bln as of Jan. 1 (3.6 months of future imports).

Evgeniya Akhtyrko: Ukraine’s 2017 C/A deficit result of USD 3.8 bln turned out to be
slightly better than our initial forecast last year of USD 4.1 bln. In 2018, we
see the C/A deficit widening to USD 4.2 bln (3.6% of GDP) amid the swelling
trade deficit. Growing goods imports, driven by consumer demand, significantly
outpacing rising exports, is the key downside risk to our forecast.