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Analysis & Commentary: Timothy Ash 
Local Markets Strategy, LM Alert, CEEMEA
Royal Bank of Scotland, London UK, Thursday, July 23, 2009 

The National Bank of Ukraine (NBU) has released balance of payments data for Q2 2009, which does show some encouraging signs/prospects for a period of greater stability for the UAH.


(1) The current account actually recorded a surplus of US$162m in Q2 2009, a remarkable turnaround from the US$3.4bn deficit posted for the comparable quarter in 2008. This also represented the first quarterly surplus recorded since Q3 2006. On a 12m moving average basis the current account deficit is currently running at around US$6.5bn, half the record US$12.9bn deficit posted for the full year in 2008. Given current trends for the full year in 2009, the current account is expected to come in flat.

(2) Much of the improvement on the current account was driven by the improving merchandise trade account. Herein the deficit narrowed to US$655m in Q2 2009, from US$4.4bn one year earlier. While exports were down by 51.4% YOY largely driven by lower prices/volumes of steel exports (40% of exports), imports were lower by a staggering 57.4% YOY.

The 40%+ nominal depreciation of the UAH, and the huge deflation in domestic demand on-going which might have produced a 15-20% YOY contraction in real GDP in H1 2009, has driven this latter contraction.

(3 The surplus on services narrowed slightly to US$422m in Q2, from US$492m one year earlier, perhaps reflective of much lower gas transit through Ukraine from Russia.

(4) The deficit on the income account rose to US$657m in Q2 2009, from just US$283m one year earlier, a reflection of the increase in the stock of external debt to around US$100bn as of April 1 2009, from US$87.8bn one year earlier, plus obviously higher risk premiums attached to Ukrainian debt/EM risk in general.

(5) Net transfers rose to reach US$1.1bn in Q2 2009, from US$833m one year earlier.


(1) Net FDI inflows slowed to US$1.1bn for the quarter, one third the year earlier level (US$3.1bn). Still this does suggest full coverage of the current account in 2009 from non-debt creating inflows which is a positive.

(2) Net portfolio flows were flat (minus US$2m), from net inflows of US$68m in Q2 2008, albeit the stock level is very low - most foreign portfolio investors long departed Ukraine;

(3) M&LT debt flows posted a net outflow of US$2.5bn in Q2 2009, versus a net inflow of US$3.5bn in Q2 2008 (US$13.5bn in net inflows from this source for the full year in 2008) - one year earlier Ukraine was still benefitting from flush global markets. Net disbursements of M&LT debt amounted to US$8.3bn in Q2 2008, falling to just US$2.7bn one year earlier. Net repayments, meanwhile, totalled US$5.2bn in Q2 2009.

(4) Short term loans posted a net outflow of US$354m, compared to a net inflow of US$1.1bn one year earlier, albeit the good news is that the level of outflows slowed from US$2.2bn in Q1 2009, and US$1.1bn in Q4 2008.

(5) Other investment (which probably is the closest proxy for capital flight) slowed to a net outflow of just US$527m in Q2 2009, down from US$2bn one year earlier, and compares with a huge net outflow from this source of US$12.2bn between June 2008 and the end of March 2009, i.e. at the height of the global crisis.

(6) Q2 2009 saw a US$2.1bn draw down in FX reserves, an improvement from the US$5.2bn lose in reserves in Q1 2009, and US$3.1bn draw down in Q4 2009.
In conclusion the NBU data suggests a much more supportive backdrop for the UAH, particularly on the current account. Banks/other sectors continue to struggle to roll external liabilities falling due as disbursements are much reduced; essentially foreign creditors are still in the process of taking risk off the table.

The provision of official IMF financing has helped to stabilise the balance of payments, and in the short term the release of the next tranche of US$3.3bn in IMF financing should help Ukraine get thru the peak in debt service payments looming in August/September.

Thereafter the risk is that the commencement of the election campaign for presidential elections in January begins to increase capital flight, pressurising the UAH somewhat and probably to around UAH9:US$1  at year end 2009 - again most flight capital has already probably left Ukraine, suggesting much less scope for a repeat of the meltdown from H2 2008.

Assuming a "constructive" outcome to those elections, the BOP position suggests some scope for the UAH to bounce back, probably to close to current levels by mid-2010.

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