Political Revenge Squelched
Local elections didn’t bring widely expected revenge of populist and pro-Russian parties. Still, the October vote underscored a few interesting trends. First, there was no dominant winner. Though national parties led the pack, dozens of local political forces entered local councils, creating a mixed local political landscape. There’s been a shift in the sympathies in the east – some traditional patrimonies of the former Party of Regions are now, surprisingly, beginning to support alternative forces.The pending second round of mayoral elections on the political front line of Dnipropetrovsk is indicative of this trend. Local voting also showed that the so-called “tariff revolution” is unlikely to happen. Populist parties like Tymoshenko’s Batkivshchyna improved their standing, but support is insufficient to push a new agenda.
After the debt restructuring deal, the Finance Ministry started pushing for tax reform. The Cabinet proposed an appropriately-named “everything at 20,” with a 20% tax rate for four taxes, including the payroll tax, now at 37%. The Finance Ministry estimated nearly UAH 60 billion in revenue losses from this reform.An alternative reform was simultaneously developed in the parliamentary committee for tax and customs policy, and it pushed for much more radical tax cuts (for example, cutting VAT to 15% from the current 20%). The Finance Ministry estimated losses from this alternative proposal at about UAH 200 billion. The IMF made it clear that the alternative tax reform did not fit its designs, and has scheduled talks for November.
The economic situation has been gradually improving. The decline for industry has slowed to -5.1% (-16.6% y/y for September 2015), though these figures mainly reflect a low comparative base. Falling resource prices and Russia’s own economic woes indicate no promise of a speedy recovery.We project a 14.3% y/y dip for industry in 2015.
The budget continues to benefit from inflation and a temporary revenue influx. In September, the general budget shot up 49.1% y/y, with half of this increase due to momentary Central Bank profits, and additional import duties.With a UAH 32.5 billion surplus for 9m 2015, it’s clear that the budget will remain on safe side this year. However, 2016 will bring serious dilemmas. The IMF is calling for the budget deficit to shrink to 3.7% of GDP while more than UAH 60 billion of the temporarily available revenues will have dissipated by 2016. Moreover, the targets for tax reform will also generate a revenue drop. The Cabinet at the moment lacks a plan to deal with this.
The current account climbed to a $135 million surplus in September, from $57 million from a month ago.Delayed gas purchases, and some exports gaining momentum, were the main catalysts. Still, this trend cannot be expected to continue. In October Naftogaz resumed purchasing gas from Russia. These and other considerations lead us to project a $1.8 billion CAD (2.0% of GDP) for 2015.
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