IMF deal grows closer, but gas rates are a sticking point
The depreciation of the hryvnia and continued backing and forthing over the next rise in consumer gas rates have been the two main topics this mid-summer. Economic data remains predominantly positive, with payroll tax collections the only exception: these have noticeably underperformed, and the Pension Fund will need additional subsidies from the state budget in 2018.
In July, the Rada finally approved amendments to the Law on the High Anti-Corruption Court (HACC), and the IMF responded positively to this move. Gas rates are now the key bottleneck in the IMF talks. But Premier Volodymyr Groysman remains uncertain about how to take such a step, without incurring serious consequences for his political future. A few options are under discussion, but the IMF is insisting on a most dramatic 50-60% hike -- and so far, no sign of compromise can be seen.
Groysman is under pressure, and the recent start of a slide in the hryvnia, which was down 2.4% for the last two weeks of July, has only increased this. The NBU explained the hryvnia drop as related to non-residents dumping Ukrainian government bonds, and the withdrawal of dividends. Media widely link this development to the unresolved IMF deal. Against this backdrop, the PM will probably be forced to approve a gas rate hike, one way or another.
The issue of a Pension Fund deficit in 2018 also remains. General budget revenues are in good shape, but the Pension Fund has an overly optimistic payroll contribution target. The current trend suggests an extra deficit at the Pension Fund of nearly UAH 10 billion, or 0.3% of GDP, which will require extra subsidies from state coffers. We expect the IMF to raise this issue in the fourth EFF program review.
The economy is performing well. In June, registered retail trade accelerated to +5.8% y/y, vs. +4.9% y/y in May. Consumer inflation was flat m/m, (+9.9% y/y) in June, as food prices slid -0.5% m/m. Industrial output growth eased to +2.2% y/y, vs. +2.5% y/y in May, as oil and gas extraction slipped, and utilities went into slowdown. However, metals picked up, to 3.3% y/y, as opposed to +0.3% y/y in May -- meaning that industry remains in good shape.
The NBU raised the prime rate by 0.5 pps, to 17.5%, despite easing inflation. Concerns about the delay in the latest IMF deal are the main reasoning behind monetary tightening.
General budget revenues grew 14.4% y/y for H1 2018, the same rate as targeted for the whole year. However, there is a steady underperformance in payroll contributions: +27.7% y/y for H1 2018, vs. +35% y/y targeted for the year. The central budget already wired the Pension Fund an extra loan in July. More subsidies will be needed to cover pension liabilities in 2018.
The CAD widened in June to a $125 million deficit, vs. a $23 million surplus a year ago, driven by a deteriorating balance in services. Gross international reserves dropped down $17.7 billion by July, on the back of external redemptions and FX interventions.
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