Daily Insight-In the spotlight: C/A deficit grows in October

The current account deficit grew to US$907m in October, from US$197m in September, the National Bank of Ukraine reported on its website. The central bank said this was an expected outcome, caused by the increase in the natural gas supply and seasonal fall in the services trade surplus. October\'s data was a continuation of the worsening trend of the cumulative current account balance, which saw its rolling 12-month deficit grow to US$2.8bn (or around 2% of GDP). The US$329m surplus on the financial and capital accounts of the balance of payments was due to: 1) foreign direct investment inflows (of US$466m, which is considered quite high for this year); 2) increased net borrowing of the corporate sector (US$551m); and 3) continued purchases of Ukraine\'s local sovereign bonds by non-residents (US$264m). At the same time, the volume of currency outside banks remained high, at US$1.7bn. However, contrary to the other months, the inflows to the financial account of the balance of payments were not sufficient to cover the current account deficit. As a result, the overall BoP deficit reached US$578m in October, and was financed by the central bank\'s international reserves, which decreased to US$34.3bn (which is equivalent to 5.8 months of future imports).

Investment implications: The deteriorating current account balance is a matter of concern for the country, and could mean that the effects of its recent major devaluation of its currency, the hryvnia, are by now exhausted. As further local-currency devaluation does not seem to be a viable solution, the way to improve the country\'s export performance and enhancing import substitution lies in the efficacy of the economic reform agenda launched by the new government. The new tax code, currently being debated in the parliament, is set to prompt the development of certain industries, such as light industry, tourism, aerospace, and others, which are deemed to stimulate exports and import substitution in the mid- and long- term.