Fitch Upgrades Ukraine's National Currency Rating to 'CCC+' Thanks to Debt Policy

Fitch Ratings has upgraded Ukraine's Long-Term Local-Currency (LTLC) Issuer Default Rating (IDR) to 'CCC+' from 'CCC-', and affirmed the Long-Term Foreign-Currency IDR at 'RD' (Restricted Default), the agency reported.

This means Ukraine is no longer in default in local currency, but is still in a formal default position in foreign currency. A Foreign Currency Credit Rating also means how the country can act to access the foreign exchange needed for timely servicing of the rated obligation before the creditors.

Fitch has also assigned 'CCC' foreign-currency issue ratings to the Bond A series (2029, 2034, 2035 and 2036) and Bond B series (2030, 2034, 2035, and 2036).

However, significant credit risks remain due to the ongoing war, with public debt projected at 89.6 percent of GDP in 2024.

These are the same Eurobonds Ukraine issued under the conditions of a successful Eurobond restructuring agreement – approved in a vote by the majority of the creditors on Aug. 28.

Reasons why Ukraine upgraded its credit rating

Fitch Ratings conclude key drivers for an upgrade of the credit rating in local currency:

• Completion of Eurobond debt exchange: On Aug. 30, Ukraine completed the restructuring of outstanding sovereign Eurobonds ($19.7 billion) and state-guaranteed Ukravtodor debt ($0.7 billion). The total debt amount of $20.5 billion ($24.3 billion including accrued interest during the August 2022 two-year standstill on Eurobond payments)  was transformed into eight Eurobonds with $15.2 billion principal.
• The same new eight Eurobonds are rated with a 'CCC' rating, which reflects Ukraine's reduced external bond debt service with no principal payment until 2029 and manageable coupon payments of $165 million (0.1 percent of projected GDP) in 2025, $423 million (0.2 percent of projected GDP) in 2026.
• Lower Government Debt Payments since the restructuring resulted in a nominal haircut of 37 percent – the cut in the price per one Eurobond, their actual price was around 40 percent before the invasion so Ukraine’s government has been negotiating the agreement of the nominal price.
• The government has fewer debt payments also thanks to a significant debt service reduction over the long term (estimated savings of $22.8 billion until 2033). Fitch lowered its forecast on the debt-to-GDP ratio: from 92.5 percent at the review in June to 89.6 percent of GDP in 2024

The protracted nature of the war remain a substantial credit risk

Fitch Ratings concludes the war possibly extending into 2025 will lead to continued large fiscal deficits – the amount of money Ukraine has to spend without the sources of the same income (budget deficit).

Other Topics of Interest

Ukraine’s Budget Indicators May Recover After 5-10 Years, But Only After War Ends, Finance Minister Says

Half of Ukraine’s state budget is reliant on financial aid from other countries because of defending itself against Russia, and returning to pre-war normal is “impossible” during wartime.

The agency projects the fiscal deficits at 17.5 percent of GDP in 2024 and 15.3 percent in 2025.

Another risk is financing uncertainty from 2025, partly due to the US electoral cycle, potential donor fatigue, residual risks over EU financing plans, and limitations in local banks' capacity to significantly increase their government debt holdings.

However, Ukraine’s previous homework has helped reduce near-term macro-financial risks that could potentially ruin Ukraine’s war-torn economy. This includes international reserves having reached $37.2 billion in end-July, and Ukraine's credible policy mix and continued official support in line with the IMF's 2023 four-year $15.6 billion Extended Fund Facility program (EFF).

“This further supports Ukraine's capacity to meet the new Eurobond commitments, despite the obvious exceptional uncertainty related to the war with Russia,” Fitch Ratings concluded.

What’s next for Ukraine’s creditors

Ukraine has not completed the restructuring of all debt it owns.

“Ukraine is still in the process of restructuring non-bond external commercial debt and in late August the government ordered temporary suspensions of payments on the instruments involved,” the agency’s press release reported.

Ukraine has suspended the payments of some loans and bond payments:

• Cargill – $0.7 billion loan, payments suspended from Sept. 3, 2024)
• Ukrenergo's state-guaranteed Eurobond – $825 million total bond amount, payments suspended from Nov. 9, 2024
• GDP warrants – payments suspended from May 31, 2025).

Ukraine suspended the payments until debt restructuring negotiations are completed.