IMF plans further discussions on third tranche to Ukraine

The IMF mission completed on Oct. 2 its 11-day visit as part of its second review of its four-year, USD 17.5 bln EFF program, its press service reported the next day. Understanding was reached on most issues, said Mission Chief Nikolay Gueorguiev. “However, as the authorities still need more time to fully flesh out their policy proposals for 2016 in some areas, discussions will continue in the coming weeks”,  he said. Remarkably, the IMF lowered Ukraine’s GDP growth forecast to -11% yoy from -9% yoy estimated previously, according to the Oct. 3 statement. For 2016, the IMF GDP growth projection remains unchanged at 2% yoy.

Also, the IMF statement mentioned that Ukrainian authorities are committed to ensuring fiscal stability by adhering to the program’s deficit target of 3.7 percent of GDP for 2016. “This will include efforts to offset the loss of one-off revenue and to cover spending commitments, including for energy-related assistance to households to help defray the cost of higher energy prices,” Gueorguiev said.

Alexander Paraschiy: Fiscal uncertainty is the main reason for the postponed decision on the third tranche, which was expected by central bank officials to arrive in October. Managing Director Christine Lagarde indicated on Sept. 6 that the IMF is quite optimistic about Ukraine’s progress. At the same time, the loss of one-off revenues in 2016 – including temporary import duties (UAH 14.0 bln in 8M15), 3G license revenues (UAH 9.0 bln) and inflationary profits of the NBU (UAH 39.1 bln in 8M15) – will be a challenge to compensate in light of increased social liabilities. To make matters worse, Ukrainian authorities are talking about tax reform based on a payroll tax rate cut, which promises immediate further budget revenue loss.

Amid all these downside to revenue, it comes as no surprise that the IMF decided to wait on a decision on the third tranche before a realistic 2016 spending plan is revealed. At this stage, we do not have a clear view on how the authorities might approach the task of deficit-trimming, possibly resorting to spending cuts, delayed tax reform or other options. However, we are confident the Cabinet will stick to the 3.7% of GDP deficit commitment for 2016 at any cost.

Regarding the downwardly revised GDP growth forecast, the IMF’s 2015 estimate is in line with our view of a 10.4% yoy decline. At the same time, the Fund remains optimistic about 2016 prospects, estimating 2.0% yoy growth.  We lowered our 2016 GDP growth forecast to 0.6% yoy in light of sliding resource prices on the global markets and the cooling regional economy on the heels of Russia’s problems.