Ukraine budget has surplus in March on NBU support

Макроэкономика 05.05.2014 The state budget reported a UAH 1.2 bln surplus (UAH -2.8 bln a year ago) in March 2014, on the back of a 24.4% yoy revenue increase throughout the month, the Ministry of Finance reported on April 30. As a result, in 1Q14, Ukraine’ state budget deficit equaled to UAH 4.2 bln or 0.3% of GDP, almost unchanged yoy (vs. UAH 4.1 bln in 1Q13). Alexander Paraschiy: A substantial wire from the NBU (UAH 7.0 bln in March) was the main reason for the revenue increase (+24.4% yoy) and the subsequent budget surplus throughout the month. In fact, in 1Q14, the NBU transferred UAH 15.8 bln to the budget which is almost 4x more than a year ago and already comprised 69% of the year target (UAH 22.8 bln are planned from NBU in the 2014 budget). Such unprecedented support looks like just an emergency measure in light of the turmoil in the country. Traditionally, authorities have covered the deficit with active state bonds placement; however, borrowing activity has substantially reduced through recent months. In particular, the Finance Minisrty placed only UAH 3.6 bln of state bonds in March which was below the UAH 4.4 bln due for internal redemptions that month. Most likely the approaching agreement with the IMF was the main reason for the NBU switching from state bond purchase to direct support of the budget: as we see from the IMF memorandum, the Fund has requested the ministry to discontinue advance profit transfers from the NBU to the budget during the fiscal year. Very likely the authorities decided to use the scheme for the last time before it is closed. Significant tension at the ForEx market might be another reason behind the NBU’s choice to directly support the budget – such direct support (as alternative to state bond purchases) was able to mask the troubles with state budget revenue accumulation when they arrived. In light of extreme nervousness at the ForEx market, active state bonds placement might serve as extra negative signal for market players. In any case, we should anticipate the authorities returning to the traditional practice of state bonds’ placement after the IMF money arrives. Stabilization of the hryvnia will make it easier for the authorities to borrow on the market. Thus by the end of the year we expect the state deficit to be no less than the targeted goal of UAH 63.8 bln or 4.2% of GDP.