Budget Deficit Reaches 2% of GDP just for 7M 2013

UKRAINE - In Brief 01 Sep 2013 by Dmytro Boyarchuk

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Through January-July 2013 the central budget deficit reached UAH 30.3 billion (2.0% of GDP) or 60% from the targeted UAH 50.6 billion deficit for 2013.  It is very unusual to see such a high fiscal deficit by the end of July.  Traditionally, the authorities used to postpone the main part of public spending for the 2H of the year.  But this time due to poor state collections and high level of protected spending (near 95% of total state outlays) the authorities do not have much room for maneuver.In fact, we expect that accrued fiscal gap to reach near UAH 75 billion or 5% GDP by the end of the year (excluding Naftogaz).  At the same time, it looks like the authorities do not plan to cover the outlined deficit with cash given the permanent devaluation risk at the economy.From September the Minfin will start using promissory notes to pay for state liabilities.  The mechanism for ‘cashing out’ the promissory notes is still unclear which adds nervousness to the process. But it looks like the Cabinet intends to use the quazi-money heavily to solve all budget problems.  In our opinion, if the Central bank does not agree to accept promissory notes as collateral for refinancing, the money surrogate will only aggravate the situation at the real sector.  At the same time if the Bank sets traditional way for ‘cashing out’ state securities (through refinancing), it will be the same emission mechanism as through internal state bonds (by the end of August the Bank holds 59% of all state bonds).All in all, we expect quite tough period for the authorities through this fall.  We do not know for sure how the situation might unfold but we see poor chances for promissory notes to save the b...