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The dynamics of the Ukraine’s balance of payments in 2015

25.02.2016
In order to understand the dynamics of the Ukraine’s balance of payments, as well as possibilities of its forecasting, it is necessary to indicate the components forming it. According to the methodology of the National Bank of Ukraine (which is responsible for the compilation of this document), the balance of payments is the ratio between the amount of cash proceeds received by the country from abroad and the amount of payment transactions made by the country abroad.

The main components of the balance of payments are current transactions (movement of goods, services, income and other current transfers) and capital transactions (capital transfers, non-financial assets and ownership rights, investment assets).

In order to understand the future dynamics of this indicator, data for the last two years have to be studied, because during this period the Ukraine's economy was in a recession, as well as under pressure of relations with the Russian Federation, which until recently used to be the main trading partner of Ukraine. The fact that statistical observations for the period of 2014-2015 have been made without considering the temporarily occupied territories, should also be taken into account.

The balance of payments of Ukraine in 2014-2015, million USD

Indicator 2014 2015
Current transactions -4 596 -204
Balance of foreign trade -4 606 -1 162
Balance of incomes, other current transactions 10 958
Capital transactions 400 565
Financial account -9 111 488
Balance of payment -13 307 849

The Ukraine’s balance of payments surplus in 2015 was the result of the decrease in the current transaction account deficit by 22 times to (-) US $ 204 million as compared to 2014.

The decrease in this indicator was due to the reduction of volume of foreign trade in goods and services by almost a third, while the reduction of the exports occurred at a slower pace as compared to the imports and, as a result, the negative balance of foreign trade in goods and services in 2015 was by 4 times less than in 2014 and amounted to (-) US $ 1,162 million.

The balance of other current transactions had positive value amounting to US $ 959 million versus US $10 million in the previous year. The decrease in the foreign trade activity occurred mainly due to the operations with the Russian Federation and the EU countries. According to the statistics for January-September 2015, the share of these operations accounted for 32% and 22%, respectively, of the total volume of the foreign trade in goods, while the pace of its reduction accounted for 31% and 48%, respectively.

The decrease in the trade turnover (both exports and imports) took place by almost all the product groups. The decline in imports of natural gas from Russia, whose purchase volume in January-September 2015 amounted to US $ 1,211 million versus US $ 3,829 million a year earlier, should be separately noted.

By contrast, gas supplies from the EU increased from US $ 775 million to US $ 1,690 million.

Taking into account that gas supplies for consumption in the territory of Ukraine are carried out only by Russia and the EU, we can state a drop of gas imports by 37% in monetary terms, which was a consequence of both the reduced gas price through de-monopolization of the supply market, and the reduced gas consumption.

Capital transactions (capital transfers, non-financial assets and ownership rights) in 2015 accounted for 141% of the data in 2014, i.e. amounted to US $ 565 million.

The financial account in 2015 was positive amounting to US $ 488 million versus (-) US $ 9,111 million in 2014, which was primarily related to receiving of a significant amount of official financing, including that of the IMF, as well as an increase in the volume of FDI by US $ 3,058 million.

Thus, taking into account the above, it can be stated that results of foreign economic activity of Ukrainian enterprises, the Government’s activity in the market of attraction of financing, as well as an investment flow have had the main impact on the Ukraine’s balance of payments in the recent years.

A further positive trend of these components depends on the following key factors:
  • macro-economic situation in Ukraine and the Government’s implementation of the reforms, which are aimed at increasing investments in the Ukrainian economy, in a number of sectors;
  • end of the military operation in the eastern Ukraine;
  • ability of Ukrainian enterprises and the Government to replace the consumer market of the Russian Federation (which has already been closed for the majority of Ukrainian exports since the beginning of 2016) by markets of other countries;
  • recovery of the global market conditions for the until recently key export items, such as metallurgy and machine building.
In the opinion of the rating agency «IBI-Rating», the Ukraine’s balance of payments will also be positive in the medium term, and its amount will gradually increase. Such a forecast is based on further reduction of trade relations between Ukraine and the Russian Federation by tightening of the bilateral trade restrictions since the beginning of 2016.

The volume of exports is expected to exceed over that of imports due to the reduced consumption of imported goods as a result of the rise in prices because of the devaluation of the hryvnia versus major world currencies occurring in the background of the decline in real wages of the population, which creates the consumer demand.

The important point proving this forecast is a gradual recovery of the Ukrainian economy observed in Q4 2015 and an increase in the volume of foreign investments, as well as receiving of the next tranche of the IMF and other international lenders.

The above-mentioned will have a direct impact on the hryvnia exchange rate versus major world currencies, as a positive balance of payments is evidence of an increase in foreign currency proceeds to Ukraine, and it will therefore boost the foreign currency supply in the market, which will eventually lead to strengthening of the hryvnia.

For more information please contact:
Press service of IBI-Rating
(044) 362-90-84
press(at)ibi.com.ua