Since 2016, Ukraine has had a persistently deficient current account and a surplus financial account of the balance of payments. In 2020, however, the situation became directly opposite: there was a current account surplus of USD 6.2 billion and a negative financial account balance. The first months of 2021 reproduced the general trends of the previous year and the current account surplus has already exceeded USD 1 billion.
The transformation of the persistently deficient current account was caused by an artificial restraint of consumer demand during quarantine and slowdown in the investment process under crisis and uncertainty. The key role was played by the fall in import purchases due to lower world energy prices, a crisis reduction in demand, disruption of international production and supply chains, and restrictions on retail and trade activities.
Source: Compiled by the author based on National Bank of Ukraine.
Analyzing certain components of the current account, it should be noted that in 2020 compared to 2019, there was a significant improvement of trade balance (by USD 10.7 billion) and the balance of investment income (by USD 3.5 billion). At the same time, current transfers decreased by USD 2.7 billion and receipts on “compensation of employees” item declined by USD 1.1 billion. (see Fig.1).
In 2020-2021, there was outflow of direct and portfolio investments from the economy of Ukraine, due to the volatility of international financial markets and the deterioration of the domestic economic situation in the country (see Fig. 2). In 2020, the financial account deficit totaled USD 4.2 billion.
External assets of the private sector grew to USD 6.9 billion and were at the level of 2019. This situation is a consequence of both the unfavorable investment climate in Ukraine and the imprudent liberalization of capital movements after the introduction of the Law “On Currency and Currency Operations”. The outflow of national and foreign capital from Ukraine, in fact, intensified the processes of decapitalization and financial exhaustion of Ukraine’s economy.
Source: Compiled by the author based on National Bank of Ukraine
A comprehensive external sustainability assessment of the economy reveals that in 2020 the formation of the current account surplus, reduction in the deficit of the international investment position and improved adequacy of foreign exchange reserves showed a decrease in external financial vulnerability. However, out of 12 standard indicators of external sustainability 8 indicators signal the high risks of external stress (see table). They are the gross external debt as a ratio to GDP and exports, indicators of short-term external debt, the external debt payments, the level of international reserves on the basis of 2 criteria and the dynamics of the real exchange rate of the hryvnia.
In particular, the ratio of external debt to exports of goods and services increased from 192% in 2019 to 207.2% in 2020, and the ratio of gross external debt to GDP grew from 79.2% to 80.8%. The deterioration in relative debt was due to both an increase in its absolute volume and a reduction in export revenue. The high level of debt and the significant burden of debt payments indicate a significant dependence of the condition of borrowers on the conditions of the global financial market.
An alarming symptom is that since the beginning of 2021, the volatility of financial markets has increased with the growth of long-term interest rates in advanced economies (it reflected investors’ fears about future inflation and money supply). It is obvious that if the central banks of advanced countries respond to the growth of long-term rates by raising the key policy rate, portfolio investors will begin to leave emerging markets largely.
With the growth of the absolute size of international reserves, the relative indicators of reserve adequacy are still lower than the threshold ratio. For instance, the ratio of international reserves to short-term external debt was 60.1% at the beginning of 2021, while the threshold ratio is 100%. In addition, at the end of 2020 the actual size of NBU’s international reserves was at the level of 95% of the IMF composite criterion, lagging behind the threshold ratio by 5%.
According to Ukraine’s international investment position, the negative balance of the net position decreased from 18% of GDP in 2019 to 13.6% in 2020. However, the growth rates of foreign assets of Ukrainian residents in recent years have been more dynamic compared to external liabilities. Moreover, the predominant form of retention of foreign assets by residents was foreign currency cash outside banks – its volume reached USD 93.7 billion. This means that huge domestic resources in Ukraine are taken away to lending to foreign countries, while the national economy suffers from credit and investment hunger.
Currently, the key risks to the stability of Ukraine’s balance of payments are associated with the massive outflow of capital into foreign assets and high needs for external debt refinancing. In 2021-2022, Ukraine will have to pay more than USD 17 billion for public and publicly-guaranteed debt in foreign currency, not to mention the debt payments of private borrowers. This value is equivalent to 60% of the current level of Ukraine’s international reserves. This situation indicates the fragile nature of the achieved macro-financial stability in the country and the need to continue Ukraine’s cooperation with official creditors while maintaining access to the international capital market.
Scientific Director at the Growford Institute Tetiana Bogdan for LB.