Ukraine C/A deficit falls to USD 342 mln in January

Ukraine’s current account deficit in January reached USD 342 mln, which is only slightly less than a year ago (USD 416 mln in January 2014), according to state statistics released on March 2. The deficit was fueled by exports declining at almost the same rate as imports (-34.0% yoy vs. -33.2% yoy). Exports shrunk due to a slump in demand for mineral products (-56.9% yoy), machinery (-45.2% yoy), metals (-32.5% yoy), and food (-15.8% yoy).  Imports contracted mainly on the back of food (-45.2% yoy), machinery (-40% yoy), and energy (-21.5% yoy). 

Among financial and capital accounts, a USD 548 mln outflow was reported (compared to a USD 1.5 bln outflow a year ago) that was driven by external redemptions on loans and bonds (totaling a USD 728 mln). At the same time, net FDI was reported positive (USD 108 mln) while foreign cash outside the banking system plunged USD 57 mln. 

The general balance in January reached an USD 890 mln deficit. On the top of that, Ukraine paid back USD 220 mln to the IMF. As a result, gross foreign reserves declined USD 1.1 bln to USD 6.4 bln, which is 1.2 months of future imports.

Alexander Paraschiy:  Disregarding the strong devaluation already last year, the January external accounts results are very disappointing.  Exports contraction is strengthening due to growing economic problems and occupation of Donbas, offsetting any positive devaluation effect on imports. For sure, the January deficit was not high and new devaluation that started in February will make imports fall further.

However, it looks like the C/A surplus anticipated after continued hryvnia weakening might be delayed. Our estimates show that a UAH 25/USD exchange rate through the year will balance the C/A even if exports decline by extra 26% though the year.  Stronger exports contraction will demand deeper hryvnia weakening in 2015.