Ukraine may revise natural gas rates at IMF request after Oct. 18

Ukraine’s Cabinet of Ministers approved on Sept. 28 a
resolution to prolong current natural gas rates for household and heating
utilities until Oct. 18, the rbc.ua news site reported the same day, citing the
Energy Ministry. In this way, the regulated prices under the so-called public
service obligations (PSO) will remain unchanged since April 2017. The
government had committed to the IMF to change them as of October 2017, but
instead began last year to prolong them till end-March, then till end-May and
then prolonged them for each subsequent month. 

The Ukrainian government is going to revise these
rates only after parliament’s approval of the 2019 state budget, both of which
have been required by the IMF, according to rbc.ua news site. Ukraine’s Social
Policy Minister Andriy Reva hinted on Sept. 26 that gas prices will be raised only after
there is a clarity about the IMF loan tranche.

Recall, adjusting the prices for households and
heating utilities to the market (import parity) level is among the key
preconditions of the IMF to provide the next loan tranche for Ukraine under its
EFF program launched in 2015. Another key IMF requirement is approval of the
2019 state budget with an affordable deficit, news reports said.

Alexander Paraschiy: The
postponement of PSO-based prices only until Oct. 18 (vs. full-month delays
approved earlier) should mean that this is the deadline for parliament to
approve the 2019 budget. That way, the government will be complying with two of
the most critical IMF demands simultaneously. This deadline is in line with our
conclusions published in our Oct. 28 note on the state budget.

As we highlighted in the note, a positive IMF review
is important not only for raising Ukraine’s gross reserves to a safe level by
end-2018, but it is also critical for the government to secure international
financing of the 2019 budget deficit.

In the best-case scenario, we expect parliament will
vote for the 2019 state budget in the first reading this week, and will approve
it in full during the next session week (Oct. 16-19). In which case, Ukraine
can count on the next IMF tranche in early November, as well as can receive up
to USD 1.4 bln from the World Bank and the EU by end-2018, and receive USD
1.5-2.0 bln in proceeds from sovereign Eurobond placements in November.

Failure to meet this unofficial budget approval schedule
will postpone all the tranches for at least two weeks. In addition, it will
increase uncertainty about Ukraine’s currency and may lead to further hikes in
the central bank’s key lending rate (to be considered on Oct. 25).