Ukraine C/A deficit narrows slightly to USD 251 mln in February

Ukraine’s current account deficit narrowed to USD 251 mln in February compared to a USD 292 mln deficit in the prior month (and a USD 373 mln deficit a year ago), according to a National Bank report released on March 30. Declines in both exports and imports slowed to -6.9% yoy and -5.5% yoy, respectively, from -30.0% yoy and -22.9% yoy in the prior month.

Remarkably, exports of services started growing (+9.4% yoy) in February as well as imports of services (+2.4% yoy). Declining rates of exports of goods slowed to -12.0% yoy (compared to -32.6% yoy in January). The key decline driver was  a 18.8% drop in metal exports. Declines in imports of goods also slowed to -7.3% yoy (-25.0% yoy in January), owing exclusively to a 44.6% yoy energy imports plunge. At the same time, non-energy imports increased 10.4% yoy on the back of machinery (+39.5% yoy) and chemical imports (+20.3% yoy) growth.

Financial accounts worsened to a USD 149 mln surplus in February compared to USD 413 mln in the prior month, yet they were much better than the USD 369 mln deficit a year ago. The surplus was largely based on foreign currency in the amount of USD 218 mln returning to the banking system. Remarkably, FDI also was reported impressively positive (USD 891 mln); however, it was primarily a statistical effect from rearranging debts into the statutory capital of banks.

The February general balance was reported at a USD 74 mln deficit. Still, gross international reserves increased 0.4% (USD 48 mln) owing to rising gold balance (due to gold appreciation, we assume). By the end of February, gross international reserves equaled USD 13.5 bln, which is 3.6 months of future imports.

Alexander Paraschiy: The February C/A deficit was close to our estimates. However, the reasons for the outcome were somewhat different than what we assumed. Exports have slowed almost identically to what we expected. However, commodity exports performed much worse than projected, with recovering services picking up the slack. It was a similar story with imports as non-energy imports rose faster than projected but further dramatic declines in energy imports offset that growth. From the numbers, we can draw two conclusions: (a) economic life is returning to its normal rhythms, and (b) there is a risk that the C/A deficit will be wider than we projected initially. 

We see at least three reasons why the C/A deficit might be speeding up over the upcoming months. Energy imports will accelerate at some stage. In 2M16, Ukraine imported 2.1 bcm of natural gas, which is nearly half of what was imported a year ago.  At some point, we will have to start importing extra gas to stock away for the next winter. Secondly, since non-energy imports already started to rebound (disregarding further hryvnia declines in February), the tendency will be only towards strengthening with time amid a relatively stable economic situation. Thirdly, exports do not promise to recover as fast as imports amid still sluggish commodity markets.

Though we see high risks for C/A deficit widening, we are not rushing to revise our C/A deficit forecast for 2016 in view of the volatile economic activity at the year start. So far, we are keeping our initial projection unchanged at USD 3.0 bln, or 3.6% of GDP, with room for potential revisions.