Ukraine’s Credit Rating Outlook Revised to Positive by Moody’s

September 04, 2017

Ukraine’s credit rating was revised from stable to positive by Moody’s Investors’ Service, in a statement published last week. Moody’s also upgraded the country’s long-term foreign currency sovereign credit rating from Caa3 to Caa2. Moody’s correspondingly upgraded to Caa2 from Caa3 the ratings of Ukraine’s 9 Eurobonds issued in the context of the government’s debt exchange operation in November 2015. At the same time, Moody’s affirmed the Ca senior unsecured rating of the government’s USD 3bn bond sold to Russia in December 2013. The bond is currently in default.
Moody’s said the rating upgrade was constrained to one notch because Ukraine faces a heavy external debt servicing burden over in 2019-2021 that will require additional foreign currency funding beyond what official lenders are likely to provide. Moreover, both domestic politics and geopolitical tensions could disrupt Ukraine’s access to private capital markets as well as weaken the currency, with adverse implications for the government’s debt metrics and economic stability.
Rating agencies Fitch and S&P have both assigned B- ratings to Ukraine.

The main reason for the rating outlook improvement was the fact that Ukraine’s foreign currency reserves have risen from USD 15.5bn to USD 17.8bn since the start of the year. Separately, Moody’s noted that slow but authentic structural reforms in Ukraine, if sustained, will improve government debt dynamics. The country has already undertaken reforms in the natural gas sector, public procurement system, taxation, and banking. Critical reforms still to be implemented include pension reform and land reform. In Moody’s view, the current government remains determined to press forward on reforms even though it faces considerable headwinds from powerful vested interests, in particular regarding land reform/privatization. On pension reform, the respective legislation is expected to be approved in September, which could potentially free up a USD 1.9bn loan tranche associated with the fourth review of the IMF program, assuming the IMF signs off on a delay in land reform until sometime next year. The fiscal target of the pension reform is to cut the current pension deficit in half, from 6% of GDP to roughly 3%, within a decade.      
The latest available data from the Finance Ministry said that Ukraine’s total public debt stood at USD 75bn as of 30 June 2017, including USD 26.1bn of external debt. We estimate the debt-to-GDP ratio for Ukraine at 78%; we consider that a comfortable level for Ukraine would be in the range of 60%.  

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