Ukraine C/A deficit flat yoy in January

Ukraine’s C/A deficit was almost flat yoy at USD 0.14 bln in January compared to USD 0.12 bln in the same year-ago month, the National Bank of Ukraine reported on March 4. Exports continued last year’s downward trend (-11.7% yoy) owing to shrinking demand for machinery (-30.0% yoy), chemicals (-45.5% yoy) and food (-13.1% yoy). Imports also shrank (-9.1% yoy) on the back of ongoing declining purchases of hydrocarbons (-18.0% yoy) and machinery (-22.5% yoy).

An USD 1.80 bln outflow occurred in the state’s financial and capital accounts (compared to a USD 0.51 bln inflow in the same year-ago month).  Individual cash demand (USD 0.71 bln) and bad loan rollovers (65% in January) were the key reasons. Net FDI was reported at USD 5 mln in January compared to USD 18 mln a year ago.

January’s general balance was reported with a deficit of USD 1.90 bln. On the top of that, USD 0.65 bln was paid to the IMF. As a result, gross foreign reserves dropped USD 2.6 bln to USD 17.8 bln, which is 2.0 months of future imports.

Alexander Paraschiy: January’s 3.4% percent hryvnia devaluation wasn’t much reflected in the external accounts for the month. Exports kept falling faster than imports, which was happening against the backdrop of a much lower energy bill (due to gas price discounts this month). Still owing to a 28.8% hryvnia weakening by the end of February, we anticipate a noticeable decline in consumer imports in the upcoming months, which will definitely lead to a C/A deficit contraction. A big question is what will be the reaction of exports to the devaluation.

Theoretically, Ukrainian commodities will become more competitive. However, a positive result is not certain in light of the ongoing conflict with Russia and slowing economic growth in the region, as well as still sluggish demand in the global commodities markets. Still, we assume that devaluation will have a reasonably positive effect throughout the year, coupled with the signing of the Association Agreement with the EU. As a result, we anticipate the C/A deficit shrinking to 4.1% of GDP by the end of 2014 from 8.9% of GDP in 2013.

On the side of financial and capital accounts, we do not anticipate significant investment inflow given the nation’s fragile economy and tense political situation. At the same time, we do not project strong capital outflow given the overregulated ForEx market and not much portfolio investments in the country.

What’s more, we are quite positive that IMF negotiations this month should lead to a significant loan to increase gross reserves. Though no news came from yesterday’s first meeting since Ukraine’s political crisis erupted in December, Prime Minister Arseniy Yatsenyuk underlined the government’s commitment to IMF cooperation. Thus by the end of the year, we anticipate foreign gross reserves increasing to at least USD 20 bln (depending on the IMF loan value).