MHP could receive up to UAH 1 bln in state subsidies in 2017

The Ukrainian government is considering subsidizing Ukrainian agricultural companies in exchange for canceling the special value-added tax (VAT) regime that they enjoyed, as required by the IMF, reported Dmytro Denkov, the chief editor of the epravda.com.ua news site, in an article published on Dec. 6.

The Finance Ministry, as well as industry lobbyists, have already submitted official proposals that discuss the technicalities of amending legislature that would enable the government to provide subsidies of up to UAH 4 bln (USD 155 mln), which would compensate losses from the special regime’s cancellation. 

Up to UAH 1 bln (USD 39 mln) of the proposed amount will be allotted to MHP (MHPC LI, MHPSA), Ukraine’s largest poultry producer, according to Denkov’s estimates. He stated that MHP Board Chairman Yuriy Kosyuk is a close friend to Ukrainian President Petro Poroshenko, hinting that Kosyuk has been likely personally involved in the lobbying efforts. 

Igor Zholonkivskyi: For MHP, VAT refunds and other state grant income amounted to USD 263 mln in 2013-15, or on average, USD 87 mln per year.  For example in 2015, MHP’s VAT refund amounted to USD 75.4 mln, while its EBITDA was USD 459 mln. So the VAT refund contribution was quite substantial. In 2016, the VAT refund for MHP will be halved, based on amended tax legislation. In 2017, based on agreement with the IMF, the VAT refund should be completely removed.

In our view, the probability of the Ukrainian government actually implementing the direct subsidies instead of VAT refund is higher than 50%. In and of themselves, we don’t see anything wrong about direct subsidies. For example, agricultural companies in the EU are supported through direct fiscal support provided by the framework of the Common Agricultural Policy. However, in terms of the value-added tax, EU farmers are largely treated the same as regular businesses.

The main question at this point is what legal framework will be used to maintain preferential treatment of Ukrainian agricultural producers, and what will be the amount of subsidies.

We will continue to monitor the situation and maintain our neutral view on MHPSA Eurobonds.