Ukraine C/A deficit resumes growth in July

Ukraine’s current account deficit increased slightly to USD 1.42 bln in July vs. USD 1.36 bln a year ago, according to NBU data released on August 29. Accelerating natural gas imports was the main reason for the resumed deficit expansion: in July, Ukraine sped up gas imports to 2.1 bcm, which is twice more than in June. Still, July gas imports were 30.3% less yoy. Meanwhile, goods imports declined 5.4% yoy while goods exports fell 8.3% yoy in July. 

The financial and capital accounts balance had a surplus of USD 1.1 bln, which is half of a year ago (USD 2.2 bln in July 2012). The net FDI increase to USD 905 mln from USD 168 mln in June appeared to be the defining factor of capital inflow. Individual cash demand spiked to USD 539 mln from only USD 11 mln a month ago. The provisional data, released in early August, gave the impression that Ukrainians had lost their interest in foreign cash and sold UAH 32.2 mln more than they bought in July, yet the updated statistics prove otherwise. 

Ukraine’s external financial balance (the combined balances of the C/A and financial account) was reported with USD 298 mln deficit. With the help of USD 0.4 bln of IMF redemptions, the state’s gross foreign reserves fell 0.7 bln, pushing them down to USD 22.7 bln, or 2.5 months of imports. 

Alexander Paraschiy: As we expected, the C/A deficit resumed growth as soon as the Ukrainian government started pumping more gas into its storage. Still, gas imports are far below the needed monthly volume to reach the 27 bcm of gas declared by the Energy Ministry as necessary for the year. To catch up, 2.9 bcm in monthly gas imports are needed between August and December, which is nearly a 30% higher per month compared to July.  

Remarkably, in July, non-energy imports resumed growth (+1.9% yoy) once the statistical effect of EURO 2012 had passed. That result confirms our assumption that the 1H13 trade deficit improvement was defined not only by delayed gas imports but also by a strong statistical effect. Against this backdrop, we stick to our view that non-energy imports will add to trade deficit expansion in 2H13. 

A widely discussed positive effect from grain exports did not bring much benefit for the July trade balance. Food exports were only 0.5% yoy higher. At the same time, metal exports resumed growth, by 7.6% yoy in July, and in line with a metal production increase (+1.6% yoy) as traders have been replenishing stocks ahead of the new business season. 
Importantly, the key factor in falling goods exports was a 33.7% yoy drop in railcar exports. Given that trade relations with Russia – the main importer of Ukraine’s machinery and transportation equipment – reached a conflict in August, during which many Ukrainian exports were blocked for a week at the Russian border, we are quite pessimistic about machinery exports prospects at least until the end of 2013.  
To sum up, we see that our interpretation of energy import prospects and non-energy commodity dynamics were correct. Against this backdrop, we are keeping our C/A deficit forecast at USD 14.8 bln for 2013.