Ukraine C/A deficit reaches 8.5% of GDP in October

Макроэкономика 03.12.2013 Ukraine’s current account deficit in October reached USD 1.9 bln vs. USD 1.8 bln a year ago, according to National Bank of Ukraine (NBU) data released on November 29. A faster decline of exports (-10.6% yoy) vs. imports (-2.7% yoy) stood behind the deficit expansion. Exports fell on the back of sliding machinery (-27.8% yoy) as well as chemical (-31.1% yoy) and food (-9.0% yoy) exports. Imports also fell due to a machinery (-16.0% yoy) and chemical (-9.8% yoy) imports decline. Resumed growth in energy imports (+5.0% yoy) prevented a deeper imports decline in October. The financial and capital accounts balance was positive in October at USD 1.4 bln, which was much better than outflow a year ago (USD -194 bln). However, trade credits appeared to be the main source of balancing trade deficit. Meanwhile, net FDI was negative (USD -82 mln in October) for the second month in a row. Foreign cash outflow from the banking system decreased to USD 241 mln from USD 629 mln a month ago and USD 1.6 bln a year ago. The general balance was reported at a deficit of USD 492 mln. Along with a USD 651 mln redemption to the IMF, these factors accounted for the foreign gross reserves decline by USD 1.0 bln to USD 20.6 bln (2.5 months of future imports) in October. Alexander Paraschiy: The C/A deficit keeps growing. By the end of October, the 12-month rolling C/A deficit reached USD 15.3 bln (8.5% of GDP), up from the 12-month rolling indicator as of September, USD 15.0 bln. The growth is explained mainly by a jump in natural gas imports in October. Since gas imports in November should have declined, and they since will in December, we expect the year-end C/A deficit to be close to our initial estimate at USD 14.8 bln. In regards to the deficit funding, we see that Ukraine will further rely heavily on trade credits. Earlier, Gazprom reported that neither Dmytro Firtash nor Naftogaz paid in cash for 3.2 bcm of gas imported in October, having taken gas on consignment. In this respect, we should expect the authorities to continue preserving foreign currency for gross reserves, paying only the most urgent external bills. We also expect that mass protests related to failed Ukraine-EU Association agreement will also add pressure to the balance of payments. The low demand for foreign cash from households so far will change drastically in view of political tensions in the country. We do not have a clear vision how strong this demand might be but see it at a level much higher than we observed so far this fall. Against this backdrop, we retain our concerns surrounding the hryvnia’s high risk in the remaining weeks of the year.