Cabinet of Ministers adopts budget draft with deficit at 2.5% of GDP

Ukraine’s Cabinet of Ministers adopted the 2012 state budget draft at a meeting yesterday, Ukrainian News reported. Finance Minister Fedir Yaroshenko, who drafted the budget, said that changes can still be made before the document is submitted to parliament, which he said was expected to take place on September 15. The budget deficit is planned at 2.5% of GDP. The economic assumptions used in budget planning were GDP growth at 5.5%, inflation at 7.9%, industrial production growth of 8.3%, an average exchange rate at UAH/USD 8.0, and total public debt decreasing from 3.5% to 2.5% of GDP. Prime Minister Mykola Azarov, quoted by newspaper Zerkalo Nedeli, said that budget priorities were social spending and job creation. First Deputy Prime Minister Andriy Klyuev said the budget projected the weighted average price for imported gas to Ukraine at USD 414-416/tcm, which is in line with the formula in the 2009 gas contract between Russia and Ukraine. Svetlana Rekrut: We think GDP growth of 5.5% y-o-y and industrial output of 8.3% y-o-y might be too optimistic considering the uncertain situation on global financial and commodity markets. Ukraine, as an export-oriented economy (export amounts to 38% of GDP), is highly vulnerable to external shocks and the global economic slowdown. So far, commodity prices have remained relatively stable (i.e. CIS steel, FOB has continued to trade at USD 685 per mt over the last six weeks). However, further commodities growth is unlikely and consequently a considerable increase in Ukrainian industrial production. At the same time, we consider the UAH/USD exchange rate of 8.0 as realistic if Ukraine makes the effort to meet IMF requirements and renew its loan program. An increase in consumer gas tariffs, a major IMF requirement, would considerably decrease pressure on the budget deficit, making the planned 2.5% of GDP figure also look realistic.