Ukraine C/A deficit hits 8.9% of GDP in 2013

Макроэкономика 05.02.2014 Ukraine’s 2013 C/A deficit was USD 16.1 bln (8.9% of GDP), ballooning from USD 14.3 bln (8.1% of GDP) in the prior year, the National Bank of Ukraine (NBU) reported on February 4. A faster exports decline (-7.6% yoy) compared to the imports contraction (-5.8% yoy) was the main reason behind the outcome. Exports fell due to declined sales of machinery (-20.2% yoy), chemicals (-13.8% yoy), metallurgy (-7.0% yoy) and food (-4.8% yoy). Imports slid owing to fewer purchases of energy (-18.8% yoy) and machinery (-12.6% yoy) products. Financial and capital accounts concluded the year at a considerable surplus (USD 18.2 bln), almost doubling yoy from USD 10.1 bln in 2012. Eurobond placements and other investments (i.e. trade credits) appeared to be the key source of investment inflow in 2013. In particular, Russia claimed Naftogaz, Ukraine’s gas transit and production monopoly, owes Gazprom USD 2.7 bln for natural gas consumed in 2013, amounting to the year’s largest trade credit. Also in 2013, the authorities managed to place USD 5.3 bln Eurobonds, including USD 3.0 bln sold to Russia as part of the Dec. 17 agreement. At the same time, net FDI slid dramatically to USD 3.3 bln from USD 6.6 bln in 2012. It’s noteworthy that individual demand for foreign cash halved to USD 3.8 bln in 2013 from USD 8.0 bln in the prior year on the back of hryvnia stability. The general balance was reported at a surplus of USD 2.0 bln in 2013. Still, it was not enough to cover USD 5.6 bln in redemptions to the IMF. As a result, gross foreign reserves declined USD 4.1 bln to USD 20.4 bln, which is 2.4 months of future imports. Alexander Paraschiy: Our last estimate of the 2013 C/A deficit was 8.7% of GDP, quite close to the NBU figures. Sliding commodity prices (metals and grains), as well as a slowing Russian economy, provided a poor basis for an exports revival in 2013. Even active energy import cuts, as well as higher car import tariffs, did not save the situation. As a result, the 2013 C/A deficit reached a level (8.9% of GDP) unprecedented in independent Ukraine’s history. Therefore, it looks logical that the hryvnia plunged into a devaluation slide in January that is continuing. For rest of 2014, we anticipate some changes in the trend. Firstly, the hryvnia has already lost 7 percent of its value this year, which should revive Ukrainian exports somewhat over the next 12 months. What’s more, we are assuming that Russia will keep gas price discount throughout the year, thus cutting Ukraine’s energy bill by up to USD 2 bln. In light of these conditions, we project the C/A deficit will slide to USD 12.2 bln, which is nearly a 7.0% annualized rate under a UAH 9.0/USD exchange rate.