Ukraine’s trade balance switches into surplus in 1Q14

Макроэкономика 16.05.2014 The trade balance on goods and services has resulted in a USD 1.3 bln surplus in 1Q14 vs. a USD 1.2 bln deficit a year ago, according to an UkrStat report on May 16. The balance on services remained almost unchanged with a USD 1.7 bln surplus in 1Q14 vs. USD 1.9 bln a year ago.  At the same time, the trade balance on goods significantly improved with deficit shrinking to USD 0.05 bln vs. USD 2.7 bln in 1Q13. Merchandise exports decreased 6.9% yoy following sliding exports of locomotives (-61.0% yoy), metals (-37.2% yoy), food oils (-43.9% yoy), and chemical products (-29.8% yoy).  Imports decreased more dramatically (-20.5% yoy) on the back of a decreased energy bill (-26.6% yoy), falling imports of vehicles (-38.2% yoy) and sliding imports of machinery equipment (-31.4% yoy).     Exports to Russia fell the strongest (-24.4% yoy or USD 0.9 bln in 1Q14) being the main factor behind a USD 1.1 bln exports contraction.  At the same time, a Russian imports decline (-26.0% yoy or USD 1.4 bln) was among the key contributors to a USD 3.7 bln imports contraction throughout the quarter.     Alexander Paraschiy: As we expected, the hryvnia decline, conflict with Russia, and a lower gas price (USD 268.5/tcm vs. USD 406/tcm a year ago) in 1Q14 were the key determinants of external trade dynamics at the year’s start. While the role of the energy bill decrease looks dominating throughout the quarter (lower gas prices are responsible for a USD 1.3 bln out of USD 3.7 bln imports decline); we do observe a strong declining trend also on non-energy imports (-18.1% yoy in 1Q14).    Given that the strongest hryvnia devaluation happened only in April, we should expect the trend with non-energy imports to only strengthen. At the same time, the energy bill over the upcoming months is expected to increase substantially. We do not yet have a clear picture what the price of gas will be (discussions are still in progress); however, Ukraine from April has intensified the pumping of Russian gas to its storages.  In particular, last month gas imports reached 2.6 bcm which is 73% more than a year ago.  In May this tendency has continued.  Against this backdrop, before we know exactly which gas price Moscow will agree to, we are keeping our trade deficit for goods projection at USD 5.5 bln in 2014 (vs. USD 13.7 bln in 2013), according Ukrstat methodology.