Ukraine balance of payments improves in March

Ukraine’s balance of payments improved significantly in March as the current account (C/A) deficit stood at a reasonable USD 313 mln and was more than offset with USD 688 mln in net capital inflows. This brought Ukraine’s 1Q12 external financing gap (combined C/A and financial account balances) to negative USD 569 mln. Ukraine continued to counterbalance its decline in exports of steel and steel products (down 17% yoy in March) via a reduction in imports of natural gas (imports of mineral products declined 24% yoy). Commodity exports and imports both declined 3% yoy in March which helped to narrow the monthly commodity trade deficit to USD 893 mln (down USD 60 mln vs. March 2011). Overall, the 1Q12 commodity trade deficit shrank 11% yoy to USD 2.7 bln. On the financial account side, net capital inflows into the corporate sector fully offset outflows from banks in 1Q12 (but fell short of banking sector repayments specifically in March). Inward FDI remained strong at USD 508 mln in March, which brought net 1Q12 FDI inflows to USD 1.4 bln (+64% yoy). FX outflows from banks into the cash market (one of the components most heavily affecting the financial account) were 14% yoy lower in 1Q12 at USD 2.0 bln.

Vitaliy Vavryshchuk: BoP data for March and 1Q12 is broadly positive as Ukraine’s C/A shortfall remains smaller than in 1Q11. The financial account is in surplus (albeit at a much weaker USD 0.6 bln in 1Q12 mln vs. USD 2.5 bln a year ago) thanks to hefty FDI inflows and continued inflows of debt capital into the non-financial corporate sector. Given that Ukraine’s FX interbank market remained fairly balanced in April, we think the C/A deficit remained fully covered by foreign capital last month as well. With 1Q12 BoP data in hand and given that steel prices have remained broadly stable over the last two months, we upgrade our 2012E C/A deficit projection by USD 1.0 bln to USD 10.9 bln (5.8% of 2012E GDP) while leaving our projection for the financial account balance unchanged. This implies the NBU might need to spend around USD 5.5 bln from its reserves (vs. end-1Q12 level of USD 31.1 bln) to support hryvnya stability through end-2012.