Ukraine Upgraded to B from B- by Fitch with Positive Outlook

September 16, 2019
 

News
Ukraine’s sovereign credit rating was upgraded to B from B- with a positive outlook by US-based rating agency Fitch, according to a report released last week. Fitch said that Ukraine’s long-term foreign currency Issuer Default Rating (IDR) improved due to the new government’s strong stated commitment to structural reforms and engagement with international financial instruments. Analysts at Fitch predict that the country’s government debt will decline to 48% of GDP by the end of this year and to 44% by 2021. However, Fitch added that the repayment dynamics of the government debt were highly dependent on the hryvnia’s future exchange rate.
RATING ASSUMPTIONS (as reported by Fitch)
- Ukraine’s general government deficit will drop to 2.1% of GDP in 2019 and average 2.3% in 2020-2021.
- Average inflation will decline to 8.5% in 2019 and to 5.7% in 2021.
- There will be continued engagement with the IMF.
RATING SENSITIVITIES
The main factors that could, individually or collectively, lead to an upgrade:
- Increased foreign currency reserves and external financing flexibility.
- Improvement of structural indicators, such as governance standards.
- Higher growth prospects while preserving improved macroeconomic stability.
- Further declines in government indebtedness and improvements in the debt structure.
The main factors that could, individually or collectively, lead to the Outlook being revised to back down to Stable from Positive are:
- Re-emergence of external financing pressures or increased macroeconomic instability, for example stemming from failure to agree on an IMF program or delays to disbursements from it.
- External or political/geopolitical shocks that weaken the macroeconomic performance and Ukraine’s fiscal and external position.
- Failure to improve standards of governance, raise economic growth prospects or reduce the public debt/GDP ratio.

Commentary
Ukraine’s ratings upgrade follows strong 2Q economic growth of 4.6% and comes as no surprise after the country’s Eurobonds rallied sharply over the past two months. Ukraine’s state and state guaranteed debt amounted to USD 82.4bn as of Jul 31. The Finance Ministry estimated that UAH 83bn (USD 3.3bn) would be spent on debt servicing and repayment by the year end, with the lion’s share of this figure in UAH-denominated redemptions; UAH debt can be smoothly refinanced by placement of new domestic bonds. Meanwhile, for the 2020-2022 period, total debt payments are estimated at UAH 898bn (USD 36bn at the current UAH/USD rate). Payments on foreign debt are scheduled at around USD 20bn in the next three years, which means that Kyiv will definitely need to access to international markets for refinancing and also will need support from Western donors, especially the IMF.


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