Macro Snapshot - Ukrainian C/A in Sep turns positive but further adjustments needed...

National bank of Ukraine published preliminary figures on 9M balance of payments. Current account turned positive in September ($97 mn) pushed by flourishing grain exports (+12.2% m/m) and super strong sales in mechanical engineering (+26.7%).
Energy imports nosedived due to the fact that Ukraine has pumped up (and paid for) in summer the gas into storages for winter season. Machinery imports growth by 20.7% marks first signs of production facilities modernization.
9M2009 current account deficit contracted to -$1bn (0.8% GDP) vs -$9bn one year earlier. Cumulative 9M trade balance deficit of -$3.6 bn and incomes deficit of -$1.6 bn are nearly covered by positive services balance of $1.9 bn and strong transfers ($2.3 bn).
… but is expected to worsen somewhat by year end on stuttering exports, services and transfers – we expect C/A deficit to reach 1.3% GDP in 2009. Outlook for exports is weak since conjuncture on key export market worsened. Payments for services are mostly received for gas transit and Ukraine has already got the most part of payments in advance. Sale of a part of CO2 quota for $560 mn to Japan contributed into c/a for 9M2009, but other significant proceeds are unlikely this year. The inflows through transfers are expected to be moderate till the end of 2009.
Financial account is deeply in red: in 9M2009 its deficit accounted for -$11.2 bn and we expect it to reach -$12.2 bn by 2009 YE against the backdrop of:
a) net outflows through loans and bonds redemptions at -$4 bn (mainly in banking and sovereign sector);
b) short-term loans redemptions – we attribute them to syndicated loans redemptions by banking sector, as a number of such agreements was arranged in 2007-2008 and had 1-2 years tenor;
c) FX drain through cash purchases by population, that reached -$7.1 bn year to date and is a key driver that puts financial accounts at stress. Indeed, Ukraine has to pay a huge price for being highly dollarized economy as flight to cash FX in domestic savings still hurts BoP more than actual flight of foreign capital.
Combined BoP deficit in 3Q2009 more than doubled comparing to 2Q, reaching -$4.9 bn and being fully defined by financial account poor performance. We forecast BoP deficit for 2009 YE at -$13.5 bn.
Bottom-line: some further C/A adjustments may be needed in order to compensate a mess on financial account side. We therefore expect protracted weakness of local currency, albeit UAH FX rate does look sound (or even undervalued) from fundamental point of view.
(See BoP details on the next page)