RPT-Fitch: Ukraine's external finances are key weakness for rating
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Oct 8 (Reuters) - (The following statement was released by the rating agency)
The continued pressure on Ukraine's FX reserves and a fall in the price of its sovereign debt highlight the risk posed by its weak external finances, Fitch Ratings says. Ukraine has one of the lowest external liquidity ratios among 'B' rated sovereigns and this is a key credit weakness.
A re-pricing of Ukrainian sovereign risk that saw yields on 10-year dollar-denominated bonds move above 10% at the end of September will make rolling over external public sector borrowing more difficult. The need to meet external debt repayments has already contributed to another fall in reserves, which dropped by USD1.1bn in August, to USD21.7bn, pushing them further below three months of imports. In September, reserves were relatively stable, at USD21.6bn. The government borrowed USD750m in a two-year syndicated loan. However, we expect gross international reserves to continue to fall.
In June, we revised the Outlook on Ukraine's rating to Negative from Stable, reflecting the sovereign's vulnerability to shifts in market sentiment (the yield on Ukraine's 2020 Eurobond had risen 300bp in the preceding month). Our expectation was that borrowing and capital inflows would not be sufficient to finance external debt repayments and a substantial current account deficit in 2013 and 2014. This would lead to a fall in reserves and the risk of sharp exchange-rate depreciation, to which government solvency, bank balance sheets, and the overall economy are vulnerable. The latest volatility suggests that Ukraine is unlikely to regain international debt market access soon.
While this might spur the Ukrainian authorities to re-engage with the IMF and reduce refinancing risk, significant barriers to an agreement remain. These include the political sensitivities around key IMF conditions such as cutting gas subsidies, and the adoption of a law allowing the government to issue promissory notes to pay budget arrears and repay VAT to exporters. Ukraine has also proposed reintroducing a tax on foreign-exchange transactions that was removed under its earlier IMF agreement. An IMF mission will visit Ukraine later this month and will "assess the macroeconomic situation and discuss? a broad range of policy issues and plans."
Ukraine has tapped the domestic market for foreign-currency borrowing, but this has tended to be short-term borrowing, adding to the refinancing need in the coming 24 months (repayments on FC domestic debt are already close to USD1bn in both 2014 and 2015). The country is also reportedly close to borrowing USD3bn from the Export-Import Bank of China with a grace period of five years, which would provide hard currency inflows.
By the end of November, Ukraine is set to make repayments and interest payments to the IMF totalling USD2.7bn, including both National Bank of Ukraine and government obligations, with further payments of USD3.7bn in 2014. Total repayments of government and government-guaranteed debt total USD8.3bn in 2014. As we said in June, a more rapid-than-forecast fall in international reserves, whether caused by a shortfall in external financing, a terms-of-trade shock or an upsurge in capital outflows, would put negative pressure on the rating.
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