Kyiv approves its 2015 budget with a surplus, intends to refinance debt

The Council of the city of Kyiv (CITKIE) approved its 2015 budget with UAH 22.2 bln in revenue and UAH 20.3 bln in expenditures, implying a surplus of UAH 1.9 bln. Kyiv plans to accumulate UAH 7.4 bln from the personal income tax and corporate profit tax in 2015, which is 8% lower than planned for 2014. The decrease is partially due to a lower portion of personal income tax – 40% compared to 50% previously of total collections – that the city is able to retain, according to changes to the Ukrainian legislation.

In exchange, the city will enjoy UAH 8.2 bln in transfers from the state budget, compared to about UAH 7.0 bln in 2014. In expenditures, UAH 1.9 bln is earmarked for servicing the debt in 2015. Scheduled debt redemptions in 2015 of UAH 7.8 bln are to be refinanced with unspecified “internal borrowings” of UAH 5.8 bln, with the balance to be covered by the budget surplus.

Roman Topolyuk: The city’s budget surplus does not change much the reality that Kyiv’s ability to repay its 2015 Eurobond (USD 250 mln) is still dependent on its ability to refinance most of its debt. However, the surplus adds some hope that the refinancing option will be open for the city.

Kyiv city’s estimate of a UAH 7.8 bln debt redemption in 2015 (which also includes UAH 3.6 bln in local currency bonds) implies the city assumed a UAH 16.8/USD exchange rate for the year (recall, the state budget was based on a UAH 17.0/USD rate).

Kyiv’s total debt repayment will increase another UAH 1 bln if the official exchange rate rises to UAH 20/USD (the free market rate is already there). We still believe the city will be able to refinance at least 100% of its debt in 2015 (as was the case in the previous four years), which makes the likelihood of Kyiv repaying its Eurobond at least the same as for the Ukrainian state. Therefore, the current spread of the city’s 2015 Eurobond to Ukraine’s sovereign curve of about 2,240bps does not look justified, we believe.