Parliament approves budget amendments to unlock IMF cooperation

Ukraine’s parliament approved on March 2 long-awaited amendments to the 2015 budget. The revenue target increased UAH 22.5 bln to UAH 498.2 bln (26.9% of GDP). Spending was boosted UAH 35.7 bln to UAH 563.2 bln (30.4% of GDP). The central budget deficit rose UAH 12.6 bln to UAH 76.3 bln (4.1% of GDP). The overall deficit (including Naftogaz, funds for banks bailout and Deposit Guarantee Fund) reached UAH 162.5 bln 8.8% of GDP. The budget is based on a UAH 21.7/USD exchange rate.



The approved amendments are widely assumed to be the IMF’s preconditions for approving the first loan tranche of the extended fund facility. The Fund’s executive board will meet March 11 to reach its decision, Finance Minister Natalie Jaresko reported last week.



Alexander Paraschiy: The vote’s outcome was predetermined with the Cabinet scheduling the budget amendments to serve as the key to unlock desperately needed loans. Nonetheless, the approved budget is awfully unrealistic with an overestimated revenue target (that assumes a 37% revenue increase) and underestimated spending needs (assuming an exchange rate at UAH 21.7/USD, to which above the current market level.



What’s more, the size of the overall deficit (8.8% of GDP) is too large given slim gross international reserves and no chances to conduct ForEx interventions to defend the hryvnia in case of further printing. The core risk for all the assumed macro parameters is a heavy need to print new hryvnias to cover all the gaps. The size of the new hryvnia emission, which was a core driver for Ukrainian currency devaluation last year, can easily reach UAH 250 bln in 2015, compared to about UAH 200 bln in 2014.



The only chance to survive with such a budget is to receive abundant external funding that accommodates both for large ForEx interventions and external debt repayments. The submission of such an unrealistic budget promptly after the departure of the IMF mission makes us believe it had been agreed upon with the Fund.



The USD 10 bln of the first IMF wire sought by the Cabinet would adequately replenish gross reserves to secure Ukraine’s solvency through the year’s remainder. Still, at least USD 5 bln in extra financing will be crucial for defending the hryvnia vs. the U.S. dollar amid expected heavy printing of Ukrainian currency throughout the year.



Importantly, the adopted budget draft stipulated UAH 123.6 bln (or USD 5.7 bln, at the planned exchange rate) for repayment of external debt in 2015, which fully coincides with the amount of sovereign debt due this year (including USD 3.0 bln of Russian debt, USD 1.5 bln due to IMF and USD 1.2 bln in two Eurobonds).

Источник: Конкорд Капитал