Ukraine C/A deficit breaks 9.3% of GDP in November

Ukraine’s current account deficit swelled 22% yoy to USD 1.1 bln in November, according to National Bank of Ukraine (NBU) data released on Jan. 3. Contracting exports (-6.5% yoy) overwhelmed a less dramatic decline in imports (-3.5% yoy). Exports fell on the back of slumping machinery activity (-26.1% yoy) and further declines in chemical imports (-28.1% yoy). Another factor was a one-time hit from reduced energy imports (-13.0% yoy).

The financial and capital accounts surplus in November (USD 448 mln) was almost flat yoy (USD 351 mln a year ago). Non-resident purchases of domestic state bonds (USD 897 mln) were the main source of capital inflow. At the same time, net FDI was only USD 253 mln, or half of a year ago. Foreign cash outflow from the banking system strengthened to USD 841 mln throughout the month; however, it was still nearly a third less than last year.

The general balance was reported at a USD 639 mln deficit. On the top of that, the government paid back USD 932 mln to the IMF in November. As a result, gross foreign reserves grew thinner by USD 1.8 bln and reached USD 18.8 bln (or 2.2 months of future imports) by the end of November.

Alexander Paraschiy: The C/A deficit exceeded our worst expectations. By the month’s end, the 12-month rolling C/A deficit reached USD 16.3 bln (9.3% of GDP). Even a resumed decline in natural gas imports (-19.6% yoy) on the back of payment problems to Gazprom did not help to reduce the trade deficit through the month. The December deficit is very likely to be less dramatic due to this energy imports decline. However, we see the year-end C/A deficit as much worse than our initial estimate (USD 14.8 bln) from a half-year ago. We are now revising our 2013 C/A deficit to USD 15.3 bln, which is 8.7% of GDP.

As for 2014, we see the C/A deficit shrinking to USD 12.2 bln, or 6.5% of GDP, on the back of ongoing cuts to the Gazprom energy bill and somewhat better access to the Russian market for metal and food products. Though the fulfillment of the Moscow agreement for cheaper gas is not guaranteed, we estimate the trade balance will benefit by about USD 2-3 bln in case the one-third gas price discount is maintained through the end of the year.

The financial and capital accounts balance for 2014 looks secure unless the Kremlin changes its mind on the USD 12 bln in loans to Ukraine set for 2014. The funds should be enough to pay back USD 7.4 bln in external debt in 2014, cover individual cash demand and underpin a still substantial trade deficit, according to our estimates. In light of the Russian loan, we anticipate gross foreign reserves will increase USD 22.4 bln by the end of 2014.