Parliament approves Naftogaz UAH 7.4 bln capital injection

Yesterday Parliament approved the government’s UAH 7.4 bln (USD 0.9 bln, 0.7% of GDP) capital injection into Naftogaz via issuance of a UAH sovereign bond. The proceeds will be spent to cover the difference between the prices Naftogaz pays for imported gas and domestic tariffs. Mykyta Mykhaylychenko: This is in line with the government’s original plans and our expectations. Hence we keep our public debt projection unchanged at 39%-40% of GDP in 2010F (35% as of end-7M10) and budget deficit (incl. Naftogaz, excluding banks recapitalization) at 6.8% of GDP in 2010F. The scale of Naftogaz support, implied projected budget deficit and public debt size in 2010 are in line with the IMF requirements. We see the UAH bonds contributed to Naftogaz’ equity capital as being converted into cash by the central bank (either directly or through a state-owned bank). As this will augment the money supply, the NBU may need to more aggressively  sterilize excessive banking system liquidity in the months ahead (either implicitly through forex market interventions and/or explicitly through selling CDs to the banks/changing reserve requirements) to stay within the IMF ceiling for Base money volume.