Fitch Ratings on August 22, 2014, downgraded Ukraine's Long-term local currency Issuer Default Rating (IDR) to 'CCC' from 'B-' and affirmed its Long-term foreign currency IDR at 'CCC'.
The issue ratings on Ukraine’s senior unsecured local currency bonds were downgraded to ‘CCC’ from ‘B-‘ while the senior unsecured foreign currency bonds were affirmed at ‘CCC,’ Fitch said in a statement.
The Country Ceiling has been affirmed at ‘CCC’ and the Short-term foreign currency IDR at ‘C’.
Fitch says that instability in the east and disputes with Russia are affecting the economy. The government has been fighting separatists in the eastern regions of Donetsk and Luhansk beginning in April, leaving over 2,000 dead and hundreds of thousands displaced. Although the government has recaptured territory from the rebels, conflict may persist or intensify, delaying economic revival and damaging productive assets.
Fitch forecasts real GDP to shrink at least 6.5 percent in 2014, much worse than the agency had expected in February, and assumes zero growth in 2015 and 2016. Exports to Russia, the largest export market and source of energy imports, plunged 24 percent in 1H14. Gazprom cut gas supplies to Ukraine in June amid a payment dispute. Energy shortages are a risk.
Government solvency has deteriorated. The consolidated fiscal deficit, including losses of Naftogaz, the state energy company, will reach 10 percent of GDP in 2014. The government aims to cut this to 6% of GDP in 2015. Direct and guaranteed debt will surpass 65 percent of GDP in 2014 – above the level envisaged in the IMF program – but could stabilize in 2015 if energy subsidies are reduced as planned. Refinancing sovereign debt remains a challenge.
The reserves position remains fragile and only public foreign-currency borrowing under the IMF program stands in the way of a renewed external financing crisis and probable default. The hryvnia has depreciated more than 37 percent against the U.S. dollar since end-2013, leading to a sharp external adjustment. Fitch expects the current account deficit to narrow to less than 5 percent of GDP in 2014 from 9 percent in 2013, following currency depreciation and a sharp fall in imports.
Currency depreciation, recession and conflict in the economically important east of the country will have damaged the banking system’s asset quality. The government has budgeted up to UAH 30 billion (1.5 percent of GDP) to support state banks, private banks and the deposit guarantee fund. Fitch believes eventual recapitalization needs could be higher. Bank deposits fell sharply in 1Q14 but have since stabilized. The National Bank of Ukraine has provided greater liquidity to banks, and has begun to close down weaker institutions.
Fitch lists the main factors that could, individually or collectively, result in a downgrade:
-Intensification of political and/or economic stress, potentially leading to a default on government debt
The main factors that could, individually or collectively, could result in an upgrade:
-Improvement in political stability
-Progress in implementing economic policy agenda agreed with the IMF
-Improvement in external liquidity
Key assumptions are:
Ukraine continues to receive disbursements from the IMF and retains support from the EU and other multilateral organizations.
Ukraine avoids a full-scale invasion.
