OREANDA-NEWS. July 29, 2010. The International Monetary Fund’s executive board yesterday approved a 2.5-year SDR 10 bln (~USD 15.2 bln) stand-by arrangement for Ukraine. USD 1.9 bln is to be available immediately. This replaces Ukraine’s previous USD 16.7 bln program, from which Ukraine drew close to USD 11 bln in 2008-2009 (USD 6 bln to central bank reserves and USD 5 bln directly to the government).

Concorde Capital: it is still unclear whether the money will go only to the central bank’s reserves (the usual IMF practice) or partially to the government to cover the fiscal gap. As we wrote previously (see our flash note of July 5, 2010), if the government receives no or limited IMF funds, this facility still has positive implications for public finance, most importantly in terms of facilitating fiscal discipline. In July, in order to obtain the funds: (i) Ukraine’s parliament cut the planned 2010 fiscal deficit by 7%, reducing outlays (by 5.3%) and making more conservative estimates of future revenues; (ii) the government increased gas tariffs for households by 50% starting August 1; and (iii) parliament increased the independence of the central bank. Following the changes, we expect the fiscal deficit (including Naftogaz) to amount to 6%-6.5% of GDP in 2010 (vs. 7.4% in 2009). According to the IMF program, Ukraine must keep its fiscal deficit at 3.5% of GDP in 2011 and 2.5% in 2012 and have its public debt below 35% of GDP by 2015 (vs. 33% now and 40%-43% in 2010F). We see Ukraine as likely to fall somewhat short of these goals (especially regarding fiscal deficit in 2011-2012), but able to keep public debt within 40% of GDP by 2015. The new IMF facility will also provide strong support to the USD/UAH exchange rate by sending a positive signal to international investors, unlocking financing from other international organizations (World Bank, EBRD, European Commission), and supporting central bank reserves. We keep our current forecast of a stable USD/UAH rate at 7.8-7.9 through year-end.