Ukraine C/A deficit widens to USD 448 mln in March due to coupon

Ukraine’s current accounts balance in March worsened to a USD 448 mln deficit from a USD 202 mln deficit in the prior month (and a USD 228 mln surplus a year ago), the National Bank reported on April 29. The result was due to an upsurge in interest payments (USD 473 mln coupon on Eurobonds) while the trade balance on goods and services improved somewhat to a USD 278 mln deficit from a USD 454 mln deficit in the prior month. 

Exports of goods and services worsened to -12.5% yoy in March from -6.9% yoy in February. At the same time, a contraction in imports slowed to -3.8% yoy from -6.7% yoy in the prior month. Exports of goods worsened to -15.9% yoy (from -12.0% yoy in February), mainly due to falling demand for metals (-33% yoy) drop and chemicals (-42% yoy).  Imports of goods improved to -6.2% yoy compared to -8.8% yoy in February, driven by recovering non-energy imports (+15% yoy), particularly machinery (+39% yoy) and chemicals (+22% yoy). The further contracting energy bill (-56% yoy) is the only factor that has kept imports in red.

Financial and capital accounts noticeably worsened to a USD 411 mln deficit in March compared to a USD 128 mln surplus in the prior month (and a USD 536 mln deficit a year ago). Lower FDI (USD 375 mln vs. USD 891 mln in the prior month) and still noticeable outflows among “other investments” (USD 475 mln vs. USD 521 mln) were the main source of the worsened statistics, which happened against the backdrop of steadily positive foreign cash inflow to the banks (USD 268 mln in March) and a USD 334 mln loan arriving from the Japan International Cooperation Agency.

Both the C/A balance and financial account balance were negative in March, resulting in the general balance being reported at its highest deficit (USD 859 mln) since February 2015.  As a consequence, gross international reserves fell 5.7% in March, or by USD 768 mln, to USD 12.7 bln, which equals 3.3 months of future imports.

Alexander Paraschiy:  The C/A deficit expanded faster than we initially projected. Exports sunk further, disregarding strengthened resource prices. Meanwhile, non-energy imports gained momentum amid the strengthening hryvnia and stabilized economic situation. Only a 39.5% decline in natural gas imports (2.7 bcm in 1Q16 vs. 4.5 bcm a year ago) prevented the C/A deficit from deeper widening. The tendency of a fast recovery in non-energy imports looks sustainable, which means that further trade deficit widening is certain.

The news that state gas trader Naftogaz plans to reduce 2016 gas imports to 13 bcm from 16.5 bcm last year will lead to an even lower energy bill. Higher resource prices so far have helped somewhat to prevent exports from falling deeper. However, we are skeptical about metal prices rising further globally in 2H16. On the top of that, we expect the recovery in imports consumption to only strengthen throughout the year.

Against this backdrop, our initially estimated C/A deficit  of USD 3.0 bln, or 3.6% of GDP, looks overly optimistic. Even if there is no U-turn with resource prices, the current trend points to a USD 4.2 bln C/A deficit (close to 5.0% of GDP) as the base-case scenario for 2016. This tendency is also bad news for the hryvnia, which most likely will depreciate in the upcoming months.  In this context, we are keeping our hryvnia forecast of UAH 27.5/USD by the year end.