Fiscal Policy a Drag on Economy?

Fiscal plans of Tymoshenko government for 2008 were more than just
ambitious. They envisioned more than UAH 20 bln of State Savings to
be covered by privatization. As mush as 10% of the planned
privatization revenues have been raised as for October 1.

Furthermore, the expected budget deficit of UAH 18.6 bln had to be
partly financed by domestic borrowings of UAH 7.3 bln. In fact,
domestic credit crunch made primary auctions on state treasuries
(OVDP) placements barely interesting for domestic players and just
below 10% were raised as of early October. Raising placement yields
to nearly 13% (for 3-years maturity bonds) has hardly helped and
UAH 1.26 bln of the planned revenues have been raised so far.

The inability of government to find the source of funding the budget
deficit in 2008 has questioned its solvency. It was followed by a
massive sell-off in Ukrainian Eurobonds and cut in ratings’ outlook.
Non-residents have also sold almost $0.4 bln worth of OVDPs since
April 2008 in part due to hryvnya appreciation.

The new State Budget draft for 2009 envisions the deficit of 1.4% to
GDP to be covered by domestic borrowings of UAH 1.2 bln and UAH
8 bln of foreign borrowings. It becomes obvious that interest burden
for Ukrainian government will be gradually increasing. Despite the
difficulties with budget deficit financing in 2008 Ukraine is one of a few
emerging markets boasting relatively low state foreign debt of $14.8
bln, or slightly more than 8% of GDP.