Fitch Revises Ukraine's Outlook To Negative

LONDON, England -- Fitch Ratings has affirmed Ukraine's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'B' and has revised the Outlooks on the ratings to Negative from Stable.

The short-term IDR is affirmed at 'B' and the Country Ceiling at 'B'.


The revision of the Outlook to Negative from Stable reflects an increasingly fragile external financing position, the likelihood that international reserves will decline further as Ukraine faces a heavy external debt repayment schedule through 2014, and greater challenges in borrowing on international capital markets.

The Outlook revision reflects the following key rating factors and their relative weights:

High - Financing flexibility and market access: 

Ukraine's large external financing requirement makes it vulnerable to adverse shifts on international capital markets.

The rating has derived support from the ability of the Ukrainian sovereign (as well as state-owned corporates and banks) to maintain access to international markets since mid-2012 despite poor fundamentals..

Ukraine could strike a new deal with the IMF, thereby unlocking the necessary funds to refinance liabilities to the IMF. However, barring a further sharp deterioration in external financing conditions, Fitch no longer expects Ukraine to reach an IMF deal in 2013.

The authorities have not budged on key, politically sensitive conditions: cutting subsidies on domestic household gas prices which cost an estimated 5% of GDP, and moving to a more flexible exchange rate.

Raising sufficient funds from alternative sources to refinance IMF repayments totalling USD6.4bn in 2013-2014 will prove a challenge.

Economic policy coherence and credibility:

Ukraine runs a wide current account deficit of 8% of GDP.

The national bank depleted its reserves by 18% (or USD $5.3 billion) to barely two months' of current account payments in the year to end-May 2013 to support the hryvnia.

The authorities have limited scope to resist any renewed pressure on the currency, raising risks of a sharp exchange rate depreciation.

High dollarisation and foreign-currency exposure makes government solvency, banks' balance sheets and the overall economy vulnerable to such an event.

Medium - Public Debt Sustainability: 

Sovereign credit metrics are deteriorating.

The fiscal deficit widened to 5.8% of GDP in 2012 (including the losses of state-owned energy company Naftogaz) and the trend has continued into 2013.

General government debt plus guarantees stood at 38% of GDP at the end of May 2013 and is rising, despite the repayment of debt to the IMF by the national bank and the government.

As a share of government revenue, direct government debt is still comfortably below the median.

But the risk of a sharp exchange rate depreciation pushing up debt/GDP and debt service ratios has increased.

External Debt Sustainability: 

Ukraine's gross external debt is higher than the 'B' median at 78.5% of GDP.

At a prospective 28% of current external receipts (CXR) in 2013, external debt service is among the highest in the 'B' category.

The 2012 external liquidity ratio of 48% is also low.

Concerns focus on the sovereign's external debt.

Fitch recognises that the share of private sector external debt owed to related parties and the 100%+ rollover rate of private external debt since 2009 mitigates the gross external debt position.

Private sector external assets are also high. Ukraine's 'B' IDRs also reflect the following key rating drivers:

A weak business environment and governance indicators, even relative to the 'B' median, constrain the country's ability to fully exploit its economic potential.

GDP and inflation volatility are high, reflecting overheating before the global financial crisis and a deep recession in 2008-09, followed by a slowdown in 2012.

The relatively large and still-distressed financial system remains fragile, burdened by non-performing loans (NPLs) of 30%, and represents a contingent liability to the sovereign, even after solvency support since 2008 worth 10% of GDP.

As a result of a weak monetary policy regime and fragile confidence in the domestic currency, dollarisation is high.

Conversely, high levels of dollarization afford the sovereign an important measure of domestic financing flexibility in foreign currency.

Income per head is relatively high (at purchasing power parity), and private sector estimates suggest that up to half of GDP is unrecorded.

Human development indicators exceed both 'BB' and 'B' median levels.


The main factors that individually, or collectively, could trigger negative rating action:

A more rapid than forecast fall in international reserves, whether triggered by a shortfall in external financing, a terms of trade shock, or an upsurge in capital outflows.

The need for more state support to recapitalise the banking system, which is not Fitch's base case.

The main factors that individually, or collectively, could trigger positive rating action:

Successful refinancing of obligations due in 2013 and 2014 in such a manner as to reduce pressure on reserves.

A return to sustainable growth and a moderation in fiscal and external imbalances. 


Fitch assumes that the economy will grow by 0.5%-1% in 2013 and 2%-3% in 2014.

A much weaker economic performance could trigger negative rating action.

Fitch's forecast assumes some further depreciation in the hryvnia to UAH8.5/USD by end-2013 and UAH9/USD by end-2014.

Depreciation on this scale would be manageable for the financial system and the economy.

A more severe depreciation could lead to a negative rating action.

Fitch assumes that the eurozone remains intact and that there is no materialisation of severe tail risks to global financial stability that could trigger a sudden increase in investor risk aversion and financial market stress.

Such a scenario would bar Ukraine from borrowing on international capital markets and would likely trigger a downgrade.

Tensions between government and opposition have risen since the legislative elections in October 2012, causing interruptions to parliamentary business.

Fitch assumes that the government can pass legislation if required.

A serious breakdown in governability would be negative for the rating.

Source: Fitch Ratings