Ukraine C/A deficit declines more than 6x yoy in March

Макроэкономика 30.04.2014 Ukraine’s current account (C/A) deficit contracted to USD 238 mln in March vs. USD 1.5 bln a year ago. Very modest exports declining (-4% yoy) compared to a dramatic imports shrinkage (-21% yoy) are the main causes. Exports were falling on the back of sliding supplies of metals (13% yoy) and machinery (11% yoy) primarily due to problems with the Russian market. At the same time, all other export items including mineral products (+16% yoy), foodstuff (+15% yoy), and chemicals (+9% yoy) have been growing throughout the month. All imports items (except chemicals with +0.4% yoy) fell in March. Machinery contracted 41% yoy, the energy bill declined 27% yoy, and foodstuff fell 18% yoy. Unlike previous months, the financial flow turned positive in March with a USD 35 mln surplus on financial and capital accounts. An improved rollover of loans (101% through the month) and a reduced foreign cash outflow from the banking system (down to USD 719 mln vs. USD 1.9 bln a year before) were the key sources of the improved financial flow. At the same time FDI remained negative with a USD 359 mln outflow through the month. The general balance was reported modestly negative, USD -203 mln and coupled with a USD 193 mln repayment to the IMF, these appeared to be the main factors of gross foreign reserves contraction by USD 0.4 bln down to USD 15.1 bln as of end-March (2.0 month of future imports, according to NBU). Alexander Paraschiy: External accounts are improving much faster than we expected. Even disregarding a lower energy bill due to lower gas prices in 1Q14, we see non-energy imports shrinking fast (-22% yoy in March) on the back of the devaluation effect. We should also keep in mind that by March the hryvnia weakened only by 18% YTD while in April it was down more than 30% YTD on average. In other words, we anticipate non-energy imports sinking even deeper. Exports also started recovering much earlier than we anticipated. In fact, falling exports to Russia were in line with our projections; however, we anticipate the recovery of non-Russian exports only in the second half of the year while we are already observing positive signs. There is some uncertainty with energy imports (the price Ukraine will pay is not yet defined) but due to lower gas prices in 1Q14 (USD 268 per tcm) the general energy bill is expected to be flat even if Ukraine accepts an import gas price of USD 485 per tcm, as Russia requests. All in all, in light uncertainty with the energy issue, we are keeping our initial C/A deficit forecast at USD 7.1 bln or 4.7% of GDP. However, in light of the recent trend and if in view of a still pretty low hryvnia exchange rate, we see it very likely that the C/A deficit will be much lower by the yearend.