In an Oct. 6 note to investors, Renaissance Capital Ukraine analyst Anastasiya Golovach wrote that Ukraine will need a fourth IMF tranche to cover its budget deficit.
“According to Ukraine’s Ministry of Finance (MinFin), state budget revenues amounted to UAH135.4bn in Jan-Aug 2009, having increased by UAH19.4bn (16.7%) in August, reflecting seasonality. Ukraine’s budget revenues are seasonal, as profit tax – one of the key sources of general budget revenue – is collected quarterly (in February, May, August and November). Despite three of the four main peaks in tax collection having already passed, tax budget revenue is executed only at 52% of the year plan. Inflows from the profit tax dropped almost 30% YoY in Jan-Aug 2009 and VAT collection was 16% down on the same period of 2008. At the same time, budget expenditure increased 4.8%YoY for 8M09, to UAH149.9bn, resulting in a general government deficit of UAH16.4bn. We note that 97% of general budget expenditure is current expenditure (salaries, social transfers), which is unlikely to be cut this year as the presidential election approaches, despite a deterioration of revenues. We estimate the actual deficit of the general government could exceed UAH60bn (about 6%/GDP) by the end of the year,” Golovach wrote:
She added: “To cover the deficit, the government clearly needs the next disbursement of the IMF’s standby loan in 4Q09, the volume of which is expected to be $3.8bn. This, together with the precious tranches received by the government, would bring the total disbursed to more than UAH70bn (click here to view Ukraine macro and credit handbook – By hook or by crook… dated 14 Sep). The next tranche is very important for Ukraine’s authorities and we expect the country to meet all the IMF’s main quantitative criteria for it. The government has also submitted the 2010 budget draft to the Rada, which was also a key condition of the next tranche.”
According to Renaissance Capital’s Gologovich: “The most contentious topic in Ukraine’s new negotiations with the IMF will be the government’s cancellation of its previous decision to increase gas prices for households and utilities, and cut Naftogaz’s subsidies for supplying natural gas to municipal heating companies at below-cost. The government has changed the methodology for calculating these subsidies, which will result in UAH1bn less compensation for the company. At the same time, we think that, in the likely event of a successful restructuring of Naftogaz’s external debt (click here to view Naftogaz restructuring: Chances of a quick, amicable settlement now very high dated 30 Sept), the government will use this as an argument as this should help the company save more than UAH4bn this year. We expect a positive result from negotiations with IMF (the fund’s mission is expected in Ukraine in October), although they may be more difficult than the previous two sets of talks.”
