Ukraine C/A deficit improves 12x in February on lower gas prices, hryvnia

Ukraine’s current account deficit fell 12x yoy to USD 121 mln in February compared to USD 1.47 bln in the same year-ago month, fueled by a strong decline in imports (-21.7% yoy) and less dramatic contraction of exports (-7.4% yoy). Lower gas prices (USD 260 per tcm compared to USD 406 a year ago) cut the import energy bill by 37.5% yoy. Also shrinking were imports in machinery (-28.4% yoy) and chemicals (-15.0% yoy). Export declines were led by chemicals (-34.0% yoy), machinery (-20.2% yoy) and metals (-6.8% yoy).

In contrast to current accounts, financial and capital accounts continued worsening. The National Bank of Ukraine (NBU) reported USD 2.0 bln in net capital outflow in February compared to USD 2.8 bln net inflow in the same year-ago month. The key factors in the foreign currency outflow from the banking system (USD -1.9 bln) were negative FDI (USD -209 mln) and poor private loan rollovers (54% according to the NBU).

As a result, the general balance was reported at USD 2.1 bln in the red, aggravated by a USD 360 mln redemption on an IMF loan. As a result, gross foreign reserves declined USD 2.3 bln through the month to USD 15.5 bln (1.8 months of future imports).

Alexander Paraschiy: The improved external accounts exceeded our expectations. In addition to the reduced gas prices, non-energy imports fell for a fifth month in a row, which only deepened in February to -16.7% yoy vs. -5.0% yoy in January on the back of political uncertainty and hryvnia devaluation.

Against this backdrop, we expect a further contraction of the C/A deficit, regardless of gas prices increasing to USD 385.5 per tcm starting in April. For the moment, we are keeping our forecast of C/A deficit at USD 7.1 bln, or 4.6% of GDP, by the end of 2014. However, given the current rate of non-energy imports declines, the trade deficit contraction might be even more impressive.