You're reading: Moody’s highlights growing risks in Ukraine, warns downgrade possible

Moody's highlights growing risks in Ukraine, warns downgrade possible.

Local and international troubles will continue to plague the Ukrainian economy in 2012, according to a Jan. 5 report by the international credit rating agency Moody’s.

While the country possesses vast potential, the report argues, institutional problems and a high susceptibility to event risk will make it vulnerable to downgrades in the upcoming year.

Moody’s changed the outlook on Ukraine’s local and foreign currency government bond ratings on Dec. 15 from stable to negative, reflecting the country’s growing fiscal problems and stalled cooperation with the International Monetary Fund.

A combination of falling international demand, growing pressure on foreign currency reserves and a shrinking financing pool will turn 2012 into a walk on a tightrope.

Any wobbling on Ukraine’s behalf could lead to a downgrade, the agency warned, which in turn would push up borrowing costs and prompt a devaluation of the hryvnia.

It is now clear that 2012 will bring little or no respite. While the United States have seen some improvement in the past months, elsewhere the picture is much bleaker. The euro zone is looking at recession and even China’s bullet-train economy is slowing down.

Ukraine is no isolated island, as the World Bank pointed out in end-December when it halved gross domestic product growth prospects for 2012 to 2.5 percent.

Moody’s changed the outlook on Ukraine’s local and foreign currency government bond ratings on Dec. 15 from stable to negative.

This remains high compared to regional peers, and Ukraine’s diversified exports ensure that it is “well positioned to endure EU recession,” according to a report by Kyiv-based investment bank Dragon Capital. Nonetheless, it is still considerably below the International Monetary Fund’s estimate of 4 percent potential growth in 2012 through 2015.

“A lack of structural reforms hinders Ukraine from unlocking the economic potential of its favorable geographical location, educated and low-wage workforce and substantial natural resource endowment,” the Moody’s report argues.

The most serious issue, however, are the country’s institutions. According to the rating agency, institutional strength remains the weakest link in the fragile chain of Ukraine’s economic governance.

World Bank indicators for government effectiveness, rule of law, and corruption were all among the bottom 15 percent for rated countries.

This translates into policy unpredictability, as witnessed with the on-and-off approach toward negotiations with the IMF and the talks with Russia on natural gas imports. In turn, both issues aggravate fiscal problems.

According to Dragon Capital, should the gas price remain at the current $419 per thousand cubic meters this year, the government “will not do without IMF support.”

The sentiment was echoed by the rating agency, which claimed that external borrowing markets are “now closed to Ukraine,” and cited devaluation as one of the possible outcomes.

This also seems to be the take of Deputy Prime Minister Serhiy Tihipko, who announced on Jan. 11 that talks with the IMF, which demands a 30 percent hike on gas prices for households, would resume if talks with Russia failed.

Meanwhile, central bank foreign currency reserves falling faster than many expected, and the nation’s current account deficit jumped from $2.9 billion to $9.6 billion in the past year.

In the 10 years up to 2008, Moody’s noted, these deficits have been balanced out by foreign direct investments, but now these have all but dried up. The upcoming year won’t be a walk in the park.

Kyiv Post staff writer Jakub Parusinski can be reached at [email protected].