Ukraine: BoP surplus but current account worsening
Overview:
Ukraine posted a large balance of payments surplus in 2010. This allowed the currency to stabilise and the level of FX reserves to be rebuilt. This surplus comprised, however, a current account deficit and a massive surplus on the capital account. Much of the latter was a result of large (but potentially volatile) portfolio inflows rather than (more stable) FDI. The current account deficit is not large but is increasing. There is a risk that this process will accelerate as economic growth, and domestic demand in particular, start to gain momentum. Hence, the current positive developments on the FX market are subject to two risks in the medium-term. First, portfolio inflows might slow or even reverse. Second, the current account deficit might become a cause for concern.