Ukraine C/A deficit narrows to 0.2% of GDP in 2015

Ukrainian current account (C/A) deficit narrowed to USD 204 mln (0.2% of GDP) in 2015 vs. USD 4.6 bln deficit (3.5% of GDP) in 2014, according to the National Bank’s report on Feb 4. A somewhat slower exports decline (-27.6% yoy) combined with stronger imports contraction (-30.7% yoy) determined the outcome. Falling exports of mineral products (-49.5% yoy), machinery (-42.7% yoy), metals (-38.8% yoy) and foods (-13.1% yoy) accounted for more than 80% of goods exports decline (-30.5% yoy). Imports of goods decreased 33.5% yoy in 2015, mainly due to a 43.5% yoy slump in foods imports, a 31.4% yoy fall in machinery imports, a 26.9% yoy chemicals contraction and a 26.8% yoy fall in energy bill.

Remarkably, external accounts significantly improved in December 2015 resulting in a USD 418 mln C/A surplus over the month. A noticeable slowdown of contraction in commodities exports (to -14.1% yoy vs. -22.3% yoy at the prior months) amid faster imports decline (-34.0% yoy vs. -22.7% yoy) was the main reason for this outcome.  Importantly, energy imports plunged (-55.6% yoy) in December due to suspended gas imports from Russia.

Ukraine’s financial and capital accounts also improved to a USD 1.1 bln surplus in 2015 vs. a USD 8.7 bln deficit a year ago. The result was achieved due to stronger FDI inflow (USD 3.1 bln vs. USD 0.3 bln a year ago), the return of individuals’ foreign cash to the banking system (USD 2.2 bln inflow vs. USD 3.5 bln outflow in 2014), external loans from the World Bank (USD 1.0 bln), from the EU (USD 0.9 bln), and Eurobonds placement (USD 1.0 bln).

The general balance in 2015 recorded a USD 849 mln surplus (USD 13.3 bln deficit a year ago). The surplus, in conjunction with a USD 6.7 bln (net USD 5.0 bln) loan from the IMF allowed for the increase of gross international reserves by USD 5.8 bln over the course of the year for a total of USD 13.3 bln, which is 3.5 months of future imports.

Alexander Paraschiy: The C/A result in 2015 was much better than we expected. What’s more, this low a level of C/A deficit has not been seen since 2005. To a large extent the outcome stems from the December C/A surplus, which was surprising amid sliding resource prices at the global markets. In fact, it means that a new wave of declines in resource prices will have a relatively modest impact on Ukraine’s external accounts in 2016, which is in line with our revised estimates.

In particular, we anticipate exports proceeds falling by near 7% in 2016, which will shave off close to USD 3.0 bln in exports revenues. However, a large part of the decline will be offset by falling energy bills (we expect near 10% decline or USD 1.2 bln contraction) as well as by the hryvnia weakening down to UAH 27/USD on average through the year. In light of the sustainable trend of low resource prices, we expect the C/A deficit to widen to USD 3.0 bln (3.6% of GDP) in 2016.