State budget deficit below 1% of GDP in 10M11

The 10M11 central state budget deficit narrowed 4.6x yoy to USD 1.5 bln (slightly below 1.0% of 2011E GDP), according to recently published numbers from the Finance Ministry. Revenue growth remains strong at 37% yoy, supported largely by surging tax collection (+65% y/y) thanks to strong growth in nominal GDP (projected at above 20% yoy in 2011) tougher tax discipline. Svetlana Rekrut: Despite this year’s smooth budget execution, November and December promise to be more challenging as expenditures traditionally surge heading into the year-end. Nevertheless, we believe tough capital market conditions, both domestically and internationally, will demand greater budget restraint from the government. We project the state budget shortfall at close to 2.0% of 2011E GDP (excluding Naftogaz), which, along with USD 0.8 bln in T-bill and Eurobond redemptions, will mainly be covered by the government’s current cash balances.