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Ukraine Parliament emergency session accepts budget
The Parliament of Ukraine met for an emergency meeting on Thursday to vote for budget amendments addressing the consequences of the natural disaster in Western Ukraine. Two versions of the amendments were submitted to the Parliament: from the President and from the government.
The government suggested total additional expenses of UAH 2.24 bln (USD 461 mln). An increase of UAH 1.48 bln (USD 305 mln) to the budget reserves will be allocated to liquidating the flood's consequences. An additional UAH 755 mln will be spent on repairing roads in Western Ukraine that were destroyed by this latest flood, the expenses of which are planned to be financed by increasing the special fund of the Ukravtodor state-owned road construction company. The government also announced that the UAH 23.4 bln (USD 4.82 bln) three-year credit for the Ukravtodor enterprise will be pushed ahead to 2008.
The President highlighted three main concerns with respect to the government’s amendments. Firstly, the President suggested that the overall additional expenses should be increased to UAH 4.39 bln (USD 906 mln). Secondly, the President suggests that obtaining credit for Ukravtodor using state guarantees is a risky funding step as Ukraine does not practice mid-term budget planning. Finally, the President criticized the financing scheme proposed by the government. He specifically emphasized that increasing excise duties for alcohol and tobacco may lead to increases in illegal trade in the sector.
Prior to the session, the Parliament’s budgetary committee recommended the government’s variant should be accepted. The Parliament suggested that the President’s version should be used as a foundation for the final version, which must incorporate some details of the government’s variant along with comments from the opposition. Upon revisions made by the budget committee, the final version was accepted by 441 votes in favor of the 448 parliamentarians in attendance. The parliament also failed to pass two amendments proposed by the budget committee. The first amendment suggested that the funds should be controlled by the Ministry of Economics rather than local governments. The second amendment proposed to provide UAH 23.4 bln state guarantees to Ukravtodor.
The Parliament also passed a law that increases tobacco excise fees, but the government immediately announced that an additional increase will be proposed in the fall as the tobacco excise fees in Ukraine remain among the lowest in Europe.
Our view: Earlier this week, we forecasted that the budget amendments will be passed by the Parliament’s emergency meeting. We further suggested that the President’s version has substantially higher chances to be passed.
While we view the current anti-inflationary measure as rather efficient, we anticipate that the increased budget expenses will stimulate inflationary processes. However, the conservative monetary policy of the regulator, coupled with the rather small size of the proposed additional budget expenses, leads us to expect that the inflationary effect will be negligible. In addition, we must emphasize that currently a demand-driven component of Ukrainian inflation heavily outweighs its monetary component.
Therefore, we confirm our earlier end of year inflation forecast of 22%.
Ukraine state budget closes with surplus in 1H08
The Ministry of Finance of Ukraine announced that the state budget in 1H08 closed with a UAH 1.88 bln (USD 388 mln) surplus, an equivalent of 0.44% GDP. The previous surplus in January-May 2008 was UAH 6.092 bln (USD 1.26 bln) or 1.75% of GDP. The consolidated budget (that includes both state and municipal budgets) surplus in 1H08 was UAH 6.55 bln (USD 1.35 bln) or 1.53% of GDP following UAH 11.8 bln (USD 2.43 bln), or 3.4% of GDP in January-May 2008.
The government plans to end the year with UAH 18.82 bln (USD 3.88 bln).
Our view: Recently, Ukraine experienced a substantial trade deficit of USD 7.2 bln in 1M08-4M08, which is expected to increase to USD 14.3 bln by the end of 2008. It is often argued that a persistent budget deficit causes a reduction in net exports. Therefore, we anticipate that a budget surplus in 1H2008 is a positive signal that may allow for a revision of the anticipated trade deficit for a more optimistic figure. Hence, we expect that the announced budget surplus may slow down the trade deficit accumulation in Ukraine. That, in turn, will serve as an additional factor towards a stronger UAH and will somewhat inhibit inflationary processes. Yet, we recognize that, traditionally, most of the budget deficit in Ukraine is being accumulated in 2H of a year, while 1H often finishes with a surplus or a low deficit. Therefore, the positive impact of a budget surplus in 1H08 will largely depend on whether the targets for budget profits and expenses will be met in 2H08.
Ukraine consolidated debt increases 0.3% in June
The Ministry of Finance of Ukraine announced that the consolidated debt, which includes state debt and state-guaranteed debts. increased 0.3% MoM and 0.8% YTD in June 08, reaching USD 17.78 bln. Therefore, the consolidated debt reached 9% of the forecasted 2008 GDP level.
The consolidated external debt in June reached the USD 13.9 bln level or 78.6% of the overall consolidated debt. The consolidated external debt grew 0.1% MoM and 0.6% YTD in June. The state external debt reached the USD 10.8 bln level, growing 0.2% MoM and 2.7% YTD in June.
The consolidated internal debt in June reached the USD 3.8 bln level and grew 0.9% MoM and 1.8% YTD in June. The state internal debt reached USD 3.5 bln level, shrinking 0.8% MoM and 0.1% YTD in June.
In 2007, consolidated debt grew 10.17% and reached USD 17.6 bln.
Our view: While we view the overall dynamics of the consolidated debt increase as negative, we recognize that it is economically justified. The rejection by the Parliament of the earlier-announced revision of the Ukravtodor state-owned road building company crediting schedule (the credit was proposed to be pushed ahead to this year) brings relief for future expectations about the consolidated debt dynamics. We expect that the still-undecided payment schemes for natural gas may lead to a small increase in debt for 2H08. However, we neither anticipate a substantial change in the volume of the debt, nor an immediate impact of the debt on the Ukrainian economy. We expect that the debt changes will not have an effect on the real sector earlier than 2009.
ZPST management FY08 forecasts: a conservative one?
More details have emerged about the July 30 EGM of Zaporizhstal [ZPST UZ, Strong BUY] at which the company declared 100% dividends. Namely, it was revealed that the management expects an EBT of UAH 1.10 bln (USD 227 mln) and a net income of UAH 690.3 mln (USD 142 mln). The management emphasized that the forecasts depended on the USD/UAH FX rate (the management assumed the June 2008 rates to prevail in 2H08), as well as on prices of source material fuel (current levels were taken for the rest of 2008).
Zaporizhstal is the fifth-largest Ukrainian steelmaker (4.46 mln metric tons of steel in 2007, 4.37 mln metric tons expected for 2008). The company is not vertically integrated. Zaporizhstal shares have been traded on PFTS since May 20, after almost two years of being delisted due to a rough 3.13x minority dilution. The Midland Group owns a significant stake in Zaporizhstal - 47.70% according to our recent tally. The company has recently entered a contract with Siemens VAI for construction of a USD 1.7-2.0 bln, 4.7 mln tpa converter-concaster shop.
Our view: We think that the forecast is too conservative. Even accounting for the transfer pricing to the downstream trading houses, which currently is a serious problem at the company, we expect an FY2008 EBT of USD 313 mln and a net income of USD 234 mln at the ideal 25% tax.
Curiously, the FY08 net income forecast announced by the management is only 63% of the simultaneously announced EBT, whereas it should be 75% under the current income tax rate.
We think that the reason for providing such conservative estimates is setting the stage for good news, possibly as soon as August-September, when the 2Q08 results will likely become known. A stream of good news may boost the stock price and facilitate a gainful sellout.
SMASH to supply EUR 19 mln equipment by 2009: POSITIVE
Sumy Frunze (SMASH, N/R), one of largest European producers of equipment for the oil and gas and the chemical industries, has signed a EUR 18.9 mln contract with the Russian Surgutneftegaz to supply three turbocompressor units for the reconstruction of an oil compressing station by September 2009. All maintenance works will be done by Sumy Frunze as well.
Our view: The rising price of oil and gas is stimulating large investments in the development of new deposits and the maximal operation of those in existence. The growth and development of the market implies purchases of new equipment and growth in company sales. The basic customers for this equipment are from Russia and those countries of Central Asia where the largest deposits of oil and gas are situated. SMASH is strengthening its position in this region, which will drive its orders in the near future.
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