Ukraine C/A deficit shrinks to 4.0% of GDP in 2014

Ukraine’s current account deficit shrunk to USD 5.2 bln (4.0% of GDP) in 2014, from USD 16.5 bln (8.7% of GDP) in the previous year. Imports plunged 26.6% yoy while exports contracted 19.5% yoy in 2014.

 

Commodity exports dropped 14.4% yoy to USD 55.6 mln in 2014 on plunging shipments of machinery (-29.2% yoy), chemicals (-26.1% yoy), minerals (-19.1% yoy) and metals (-13.2% yoy). Commodity imports fell 27.4% to USD 61.7 bln primarily due to the machinery (-38.0% yoy) and energy (-28.2% yoy) sectors.

 

Trade contracted overall, mainly due to the conflict with Russia. In particular, commodity exports to Russia plunged 34.7% yoy to a 17.7% share of total commodity exports from 23.2% in 2013. Imports from Russia slumped 45.5% yoy to a 20.6% share of total imports from 27.4% in 2013.

 

At the same time, the EU’s role has increased as exports to the EU composed 30.8% of total goods exports in 2014 (25.8% in 2013) while EU imports made up 32.4% of total goods imports last year (30.2% in 2013).

 

Financial and capital accounts in 2014 were reported much worse as compared to the previous year. Their deficit reached USD 8.1 bln compared to a USD 18.5 bln surplus in 2013. Redemption of trade credits (including some Naftogaz debt) as well as payments on loans and bonds (including poor rollover (86%) on private sector loans) were the main channels of capital outflow.

 

At the same time, net FDI was reported modestly positive (USD 413 mln vs. USD 4.1 bln a year ago). Interestingly, foreign currency outflow from the banking system was almost flat compared to previous year (USD 2.6 bln vs. USD 2.7 bln in 2013).

 

The general balance was a USD 13.3 bln deficit (compared to USD 2.0 bln surplus in 2013) and was covered at the expense of gross international reserves that plummeted 63.1% to USD 7.5 bln, which is 1.4 months of future imports.

 

Alexander Paraschiy: The 2014 current account deficit turned out worse than our estimate, which was closer to USD 4 bln, with the main reason being a stronger exports decline (-19.5% vs. projected -15.0%) due to warfare in eastern Ukraine.

 

For 2015, we anticipate further C/A shrinkage given the new wave of hryvnia deterioration at the end of 2014. Exports to Russia will keep falling fast; however, assuming no large-scale assault from Russia, we project fast exports growth to other regions of the world due to the devaluation effect. Thus we expect the C/A deficit contracting to USD 1.2 bln, which is near 1.4% of GDP.