Ukraine C/A deficit widens m/m to USD 0.6 bln in September

Макроэкономика 27.10.2014 Ukraine’s current account deficit in September widened to USD 612 mln compared to USD 91 mln in the prior month, but it was still 4x less than the USD 2.5 bln deficit in the same year-ago month. The result stemmed from a 38.1% yoy plunge in imports (goods and services) against the backdrop of a 26.4% yoy exports contraction. For 9M14, the C/A deficit reached USD 3.4 bln, which is more than 3x less than a year ago (USD 11.5 bln for 9M13). The exports decline was predominantly on the side of services, which dropped 52% yoy in September on a slump in the travel industry, which plunged 81.6% yoy. At the same time, goods exports declined only 16.5% yoy on the back of machinery (-35.6% yoy), mineral products (-34.5% yoy) and metals (-28.9% yoy). Imports plunged predominantly due to a 56.3% yoy energy bill decline (Ukraine imported 1.0 bcm of natural gas in September vs. 4.4 bcm in the same year-ago month). Falling imports of machinery (-29.0% yoy), chemicals (-22.2% yoy) and metals (-28.7% yoy) also contributed to the outcome. Financial and capital accounts improved to USD 254 mln vs. USD 49 mln in the prior month, predominantly on the back of a USD 500 mln loan from the World Bank. Net FDI even increased slightly to USD 235 mln from USD 202 mln in August. Foreign cash outflow from the banking system was reported slightly lower (USD 225 mln vs. USD 242 mln in the prior month). At the same time, loan rollovers decreased to 87% from 90% in August. The general balance was reported with a USD 358 mln deficit (USD 42 mln); however, an IMF tranche (USD 1.4 bln) enabled gross international reserves to rise to USD 16.4 bln (3.1 months of future imports) from USD 15.9 bln in the prior month. Alexander Paraschiy: External accounts in September were somewhat worse than we anticipated. To some extent, the worsening was the result of boosted gas imports (1.0 bcm vs. 0.4 bcm in August). But the main reason was likely a slowdown in the declining rates of non-energy imports to -31% yoy from -40% yoy a month ago. It is difficult to explain why non-energy imports improved after the August-September wave of hryvnia devaluation. What we can point to is reduced declining rates of imports of machinery (-29.0% yoy vs. -52.2% yoy in August) and metals (-28.7% yoy vs. -43.2% yoy in August). One of the possible explanations for the improved imports could be the attempts of importers to purchase more foreign cash in advance amid exchange rate uncertainty. Recall, the NBU restricted foreign cash purchases and only under import contracts could one obtain foreign cash at near UAH 13/USD (more than UAH 14/USD on the black market). We suspect such a regulation could have made it appear that importers boosted their operations, which is what made the C/A look worse. In fact, if the tendency with non-energy imports is just a reflection of new ForEx regulations, we should see imports declining stronger over the upcoming months (after all, manipulating import contracts has its limits). Against this backdrop, we are keeping our initial forecast of the C/A deficit unchanged at USD 4.1 bln, which is near 3.1% of GDP.