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foreign trade

Recession did some good. For the first time since the beginning of the year the balance of payments in May is “back in black”

Recession did some good. For the first time since the beginning of the year the balance of payments in May is “back in black”

In May, for the first time this year, Ukraine’s balance of payments was positive. The National Bank of Ukraine (NBU) reports that the surplus of the balance reached US $1 bn, while last May it was US $514 mn. Such an improvement, even in terms when statistics no longer take into account the results of Crimea and Sevastopol, made it possible for the government to attract external financing and ensured a reduction of the trade deficit. Yet, the success in May did not compensate for the negative results of the previous four months of the year and based on the results of the first five months the balance of payments still showed a deficit of US $3.5 bn compared to last year’s surplus of US $3.3 bn over the same period.

Positive from abroad

In May the current account deficit was almost halved (to US $207 mn) compared to May 2013. However, this is not a positive signal as the improvement was not due to the growth of exports of goods and services, which, on the contrary, fell by 5% in May and by 8.7% based on the results of five months. In particular, exports of goods increased in May by 1.7% due to the fact that Ukraine exported 1.5 mn tons of grain versus 0.95 mn t in May – June of last year, says Director of the Analytical Department at Art Capital Ihor Putilin.

“In May and June farmers sold the remains of last year’s harvest, while the prices of agrarian products are high just before the new harvest,” says Head of the Analysis and Research Department at Raiffeisen Bank Aval Dmytro Solohub. Furthermore, due to the seasonal increase in demand for steel in the Middle East Ukrainian metallurgical enterprises increased their output this month by 2.5%, and exports – by 8%, notes Putilin. Other industries did not experience such improvements. Exports of chemical products dropped by 26.4% and exports of machinery fell by 14.6% as a result of the decrease in the supply of railway transport to Russia by 2.3 times.

In general, the decrease of the trade deficit is due to the recession in the Ukrainian economy, which led to a decrease in imports by 6.3% in May and by 16.2% in January – May. The decline in the population’s consumer appetites (in May retail sales decreased for the first time since April 2010) and the decline in industrial production, which undermined enterprises’ demand for imported investment products, led to a decrease in the import of non-energy products by 22.9% in May. The fall in imports has affected all major commodity groups, as more than 40% devaluation of the Ukrainian hryvnia forced consumers and businesses to seek domestic counterparts to replace costly imports. So, for example, the import of foreign engineering products decreased by 31.8% (including cars – by 58%), railway transport – by 6 times, chemical products – by 15% (including fertilizers – by 3.6 times), food and consumer goods – by 25.8% and by 24.8%, respectively.

The financial account was rescued from a deficit by government borrowings. The NBU reports that the US $1.2 bn surplus of the financial account in May was achieved mainly due to the placement of US $1 bn of Eurobonds under government guarantees of the U.S. and loans from the World Bank and the EU. In addition, for the first time since the beginning of the year foreign direct investments (FDI) stopped flowing out of the country at the end of the month. Their net inflow in May was only US $7 mn, but the fact that their outflow has stopped is a positive signal. However, just as in the case with the trade balance, the positive indicator in the financial account did not guarantee a plus for the entire five months, resulting from the net outflows of the FDI in the amount of US $1.1 bn since the beginning of the year and the outflow of currency from banks in the amount of US $3.1 bn.

Minus for the good

The growth of commercial exports did not last long. Putilin believes its decline resumed in June, since during the first month of summer steel production fell by 6%, according to the preliminary data of Metallurgprom and grain exports most likely fell in monetary terms due to lower prices. In subsequent months steel exports will largely depend on the demand in North Africa and the Middle East, while export of agricultural products will depend on the harvest. Based on the calculations of the Ukrainian Agribusiness Club association, the gross yield of grains and leguminous crops in the 2014 – 2015 fiscal year is forecast at 55 – 56 mn t (with the exception of Crimea), which is 11.9 – 12.1% less than in 2013. Export is expected to reach the level of 26 – 27 mn t, which is 18.8 – 21.8% less than the amount expected in 2013 – 2014.

Meanwhile, experts unanimously believe that rejection of imported products will maintain the current pace and will become the main driving force of the Ukrainian economy this year. Solohub says due to the ongoing recession non-energy imports will not recover in the second 6 months. And in June – July gas will not be purchased abroad, which, by the way, is still a vague prospect for the following months.

As a result, according to the consensus forecast conducted by the international consulting company FocusEconomics in June, imports of goods will fall by 11.6% at year-end, while exports will drop by only 4%. This will help reduce the current account deficit from last year’s US $16.4 bn to US $7 bn.

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