BoP sees double deficit in October

In October, the BoP current account (CA) deficit grew to USD 907 mln from USD 194 mln in September, according to the National Bank of Ukraine. For 10M10, the CA deficit was UAH 1.8 bln, 2.3x greater than the 10M09 figure. The widening was predominantly due to a trade balance deficit in goods, which increased by nearly a factor of 9 y-o-y. A faster import increase was driven by a seasonal rise in gas imports, which amounted to USD 1,063 bln (49% m-o-m). Imports of agricultural products grew by 13.9% y-o-y following continuing recovery in domestic demand. An increase in metals and agricultural exports (9.5% and 7.2% y-o-y respectively) still couldn’t guarantee sufficient growth in total merchandise exports outpace that of imports. For the first time this year, the CA deficit wasn’t fully covered by a Financial Account (FA) surplus. In October 2010, the FA surplus was USD 329 mln (down 77% m-o-m). The drop was triggered by much lower inflows into government debt, which accounted for over 60% of total net external investments over 9M10. FDI, in turn, remained relatively high in October, totaling USD 466 mln (down 14% m-o-m), of which 34% was channeled to the banking sector. Importantly, foreign currency outflow continued in October through the cash market, where demand exceeded supply by USD 1.7 bln, reflecting both high household demand for FX cash and an increase in shadow economy transactions. We see that with recovering domestic demand, the CA will stay in red, covered by foreign investments with more aggressive inflows into the private sector (the total BoP deficit in October doesn’t represent a new trend, in our view) going forward. For the full year 2010, we expect the current account deficit to be within 1.5% of GDP and the financial account to be at 6%-7% of GDP surplus (USD 8-9 bln).