Week's balance: Cabinet reduces government spending, PM vows not to raise taxes, and Naftogaz places $500 mln worth of securities
The government announced its intention to reduce government spending by 10% and cut thousands of jobs in regional state bodies, Prime Minister Oleksiy Honcharuk promised not to raise taxes, while Naftogaz placed 7-year securities worth $500 million – these are the main economic news of the past week.
The cabinet of young reformers led by Oleksiy Honcharuk gathered for an extraordinary meeting on the first Sunday of November, securing in public the title of "weekend government". This time, the meeting was devoted to the discussion and approval of the draft state budget for 2020.
The government press service announced the decision of the Cabinet of Ministers to approve the finalized draft of the state budget and reduce the maximum number of employees of district state administrations.
On Tuesday, key ministers held a presentation of the draft budget 2020, which was submitted to parliament for a second reading.
According to Finance Minister Oksana Markarova, the updated document proposes to reduce the budget deficit to UAH 95 billion, which is 2% of Ukraine's gross domestic product.
"We are reducing the deficit to GDP ratio to 2%. This is a big reduction," the minister said.
Head of Government Honcharuk said that the task of the Cabinet of Ministers for the next year is to reduce expenditures on public authorities. According to him, this concerns not only the reduction of the number civil servants, but also the decline in other expenses for the maintenance of state authorities.
"It seems that this is not much, but in reality it is huge amounts, it is billions of hryvnias. How much will be saved, we'll see. We set ourselves the task of saving a maximum amount, but the efficiency indicator is 10% of our expenditure," said Honcharuk.
It is worth recalling that at the end of October Minister Dmytro Dubilet announced the Cabinet decision to cut staff of district state administrations by 18,500 positions. And this week the herald of painful changes in the life of regional officials announced the reduction of 1,770 posts in the State Statistics Service.
According to him, the "optimization" will be carried out through reducing the units of the State Statistics Service at the district level, because taking into account the large number of reports that companies submit in electronic form, maintaining these units has become impractical. At the same time, the work of the State Statistics Service itself will be partially changed: reporting will be simplified.
In addition, the government will lease or privatize three hundred real estate objects owned by the agency.
Development without raising taxes
The year of 2020 will be the year of preparation for Ukraine's "economic leap", Prime Minister Honcharuk announced this week.
"This year is the year of inventory action and personnel updates, and the next year is the year to prepare for the economic leap. In fact, next year the Ukrainian economy should launch in our country, while jobs and new industries should rapidly appear; we must forget what corruption is, we must forget what smuggling is as a systemic phenomenon, and what raiding is," he said.
According to the forecast of the Ministry of Economic Development, Trade and Agriculture, the growth of the national economy in 2020, according to the conservative scenario, will be at 3.7%, while the optimistic scenario, gives it 4.8%.
During the presentation of the revised draft state budget, Honcharuk pleased Ukrainians with a promise not to raise taxes.
"We're not proposing raising taxes. The government does not bind and does not seek additional resources to raise taxes," the prime minister said.
According to him, additional resources should be sought in improving efficiency, reducing government spending, as well as strengthening anti-corruption efforts and reducing the shadow sector.
The bill, finalized by the government for the second parliament reading, provides for the expenditures at UAH 1.195 trillion.
The main items of expenditures are as follows: UAH 294 billion for social security, UAH 246 billion for security and defense, UAH 142 billion for servicing public debt, UAH 113 billion for healthcare, UAH 74 billion for road infrastructure, and UAH 145 billion for education and science.
The government did not lay out in the budget proceeds from land sales in case the market started on October 1, 2020. The prime minister explained that the main idea of the reform is not to attract the maximum amount from the sale of land, but to create civilized relations in the area.
President Volodymyr Zelensky has voiced a number of instructions to the Cabinet of Ministers. One of them is to develop by the end of this year an action plan to raise Ukraine in the Doing Business ranking.
At a meeting in the President’s Office on Tuesday with members of the government and parliamentary leaders, Zelensky also instructed the Ministry of Economic Development to begin preparations for large-scale privatization, in particular, to transfer 500 state enterprises to the State Property Fund by December 31.
In addition, the ministry is to sell four dozen property complexes of small privatization objects and blocks of shares at electronic biddings by the end of 2019.
"Also, to identify the top 5 priority sites to prepare for large privatization," the Presidential Office quoted Zelensky as saying.
As the president noted, the Ministry of Economic Development should prepare for the introduction of the land market by December 31. The Minister of Energy and the Environment, Oleksiy Orzhel, the president set the task by the end of this year to complete the Naftogaz unbundling procedure, simplify connection to power and gas grids, and reform the coal industry by the end of April.
It is also noted that, by order of the president, by the end of next year, the government shall prepare a regulatory framework to begin the process of inventorying forest resources.
In addition, the president set the task to Minister of Infrastructure Vladyslav Kryklii by the end of this year to ensure the issuance of permits for the international goods shipments and the movement of oversized vehicles exclusively in electronic form, as well as to establish effective truck weight control on roads.
Also, Kryklii was tasked with approving by June 30, 2020, the list of concession projects for 2020-2023 and beginning preparations for tenders.
Naftogaz, DTEK , and Ukreximbank securities
In the past week, state-owned energy holding Naftogaz of Ukraine and the subsidiary of Rinat Akhmetov's energy holding DTEK, took advantage of the opened window of opportunities on the global borrowing market.
Naftogaz placed 7-year securities worth $500 million at 7.625% per annum, and DTEK VIE - a company that consolidates DTEK's renewable energy assets, issued 5-year bonds worth EUR 325 million euros at 8.5%.
Naftogaz CEO Andriy Kobolyev, commenting on the placement of securities, said that the peak demand for the company's bonds exceeded supply 2.9 times, while the placement price was only 127 basis points more expensive than the sovereign debt of Ukraine, which is the lowest spread among all issues of state-owned companies this year.
"It is especially important that such a result was achieved in the context of the ongoing unbundling of the gas transmission system, one of the largest revenue sources of the company, and the uncertain situation with the continuation of Russian transit," he said.
According to Kobolyev, investor interest in Ukrainian securities in such conditions testifies to the effectiveness of reform and correctness of the chosen course for the transformation of the Naftogaz group of companies. The company also said that the proceeds will be spent on general corporate purposes, including repayment of more expensive obligations of previous periods.
DTEK VIE will direct the funds raised to its renewable energy projects.
In early November, state-owned Ukreximbank also took steps on issuing securities. According to sources, the state bank plans to issue ten-year bonds, with the possibility of early repayment in five years, worth $100 million.
The settlement date is November 14. J.P. Morgan and Morgan Stanley have been appointed organizers of the issue.
Another piece of important economic news of the past week quotes the State Statistics Service as saying the inflation in Ukraine in October amounted to 6.5% on year, slowing down from 7.5% a month earlier. In October, consumer prices rose 0.7% against September, after a similar increase in September to August. Since the beginning of the year, against December 2018, consumer prices increased by 4.2%.
According to the State Statistics Service, the largest price increase in October in annual terms was again recorded for vegetables – at 23.1%, as well as for fruit – at 19.4%, hot water and heating – at 19%, railway passenger transport – at 19%, and communication services – at 15.5%. Price reductions were recorded for eggs (18.5%), fuels and oils (13.5%), natural gas (12.5%), clothes and shoes (0.6%).
The second working week of November promises to be rich in economic news. Parliament will resume its work in plenary mode and consider a draft state budget for 2020 at second reading, and the State Statistics Service, which is now undergoing reform, will report on foreign trade performance for the nine months of 2019.