C/A gap strongly negative, financial account improves in November

Ukraine’s monthly current account (C/A) deficit was virtually flat mom at USD 1.6 bln in November, taking its 11M shortfall to a worrisome USD 8.7 bln (5.4% of  2011E GDP), the NBU reported yesterday. The merchandise trade balance deficit narrowed 23% mom as imports remained flat mom and exports grew 6.4%. The monthly financial account balance improved considerably in November from a USD 0.2  bln gap in October to a USD 0.7 bln surplus thanks to positive net external borrowings in the corporate and banking sectors (USD 1.3 and USD 0.3 bln, respectively). Net FX outflow from the banking sector into the cash market increased marginally to USD 1.5 bln while net FDI almost halved mom to a mere USD 148 mln. Overall, Ukraine’s monthly external financing gap (combined current and financial account balances) amounted to USD 0.9 bln in November (-45% mom) and USD 2.4 bln (1.5% of 2011E GDP) in 11M11.

Svetlana Rekrut: The increase in the current account deficit in November is disappointing but it was mainly the result of a strongly negative income balance, which was likely one-off. Narrowing of the monthly merchandise trade deficit in November is positive, but came solely on an upsurge in agricultural product exports, while metals and machinery exports continued to decelerate. On the financial account side, solid net debt inflow into the private sector signals the rollover of external debt has been manageable so far. We see the 2011E current account gap at close to USD 9.8 bln or 6.1% of GDP, well below the most pessimistic forecasts. The C/A shortfall should widen marginally in relation to GDP in 2012, while external financing needs will stand at about 3.0% of GDP, according to our projections. This implies hryvnya stability (still an NBU policy priority in 2012) will come at a high cost as the gap will need to be covered with central bank reserves.