Government moves to revise budget plan up

The Cabinet of Ministers announced details of its plan to revise the state budget for 2012. The recently published draft law (which we believe will be approved shortly with little or no changes), calls for a 10% increase in revenue and a 9% hike in expenditures (both are planned to grow by UAH 33 bln or 2.2% of 2012E GDP), while leaving the deficit target unchanged at UAH 25 bln (USD 3 bln). The increase in revenue is expected to come firstly on the back of higher collection of VAT (+12% vs. the current plan) and corporate profit tax (+8%). The document specifies that additional revenue will be mainly be used to enhance social programs, namely increasing pensions as of May and compensating for retail savings lost due to the collapse of the Soviet Savings Bank. The targeted increase in social spending is in line with the president’s new social initiatives. The government said it believed the higher revenue plans were realistic thanks to better than previously expected economic developments supported by robust household and investment demand.

Key 2012 state budget parameters, UAH bln                      
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              Current Planned
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Revenues           332.8   366.2
 % of GDP*       22.0%   24.2%
Expenditures     358.0   391.3
 % of GDP*       23.6%   25.8%
Deficit               25.1    25.1
 % of GDP*       1.7%    1.7%
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* based on Concorde Capital projection for nominal GDP                      
Source: draft law on amendments to the 2012 state budget  

Vitaliy Vavryshchuk: The announced revision is well above earlier plans to raise revenue and expenditure targets by 4-5%. Growth in state budget revenues in 1Q were indeed slightly above the current plan (+16% yoy vs. planned 10% yoy), however, in our view it is too early to state that the trend is sustainable. The current budget is based on the assumption of 3.9% GDP growth, which looks overly optimistic (we stick to our forecast of 1.9% growth this year). Thus, we think the higher revenue plan implies firstly tougher tax collection procedures and more administrative pressure on business. Needless to say, the more ambitious revenue target raises risks government will miss its 2012 state budget deficit plan (1.7% of GDP).