C/A deficit sours, but capital inflow strong in October

Ukraine’s monthly C/A deficit surged to USD 1.5 bln in October (USD 1.0 bln in September), taking the 10M11 shortfall to USD 7.0 bln (4.2% of 2011E GDP), the NBU reported. The monthly financial account deficit improved sharply to USD 0.1 bln from a USD 1.0 bln gap in September as net cash FX outflows from the banking sector dropped off 26% mom to USD 1.4 bln and debt inflows remained strong. Vitaliy Vavryshchuk: The monthly numbers came as a negative surprise as commodity exports continued to slow on the back of feeble external demand and prohibitive grain export tariffs. Meanwhile, import growth remained robust at 23% yoy in October, largely thanks to strong machinery purchases. We believe renewed grain exports drove the narrowing of the monthly C/A gap in November, although this trend will likely reverse in December on a probable seasonal surge in domestic demand. All in, we now see the C/A deficit hitting 5.5% of 2011E GDP (well below the most pessimistic forecast out there) and widening next year to more than 6.0% of GDP. With capital market conditions remaining constricted, capital inflows are unlikely to cover the C/A gap through end-2011 and 1Q12. Subject to an improvement in the European debt crisis, we expect Ukraine’s external financing gap (combined C/A and financial account balances) will remain at a reasonable USD 4.5 bln in 2012, posing no major threat to currency stability.