RPT-Fitch: Ukraine Clashes Show Political Fragility Remains a Risk

Wed Jan 22, 2014 8:00am EST

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Jan 22 (Reuters) - (The following statement was released by the rating agency)

Clashes between anti-government protestors and police in Ukraine could weaken confidence and push up demand for foreign currency, although Russiaas provision of external financing has significantly reduced the risk of a sovereign external liquidity crisis in 2014, Fitch Ratings says.

Political uncertainty will continue to weigh on Ukraineas credit profile heading into presidential elections due in February 2015, notwithstanding the Russian agreement.

Street protests began in late November after the government halted preparations to sign an EU Association Agreement. But the clashes in Kiev that began on Sunday, prompted by the introduction of anti-protest laws, are the first time they have turned violent. At least one person has been killed, according to media reports today.

The political climate in Ukraine remains very fragile. This is underscored by the lack of a co-ordinated opposition programme, the deep-seated nature of the protestorsa grievances and the potential impact of any response to the violence by the international community. All of this suggests that the crisis is still some way from resolution.

A weakening of President Yanukovichas position this year might affect Russiaas willingness to continue disbursements. If Russian lending were interrupted, the hryvnia, which has fallen on this weekas violence, could come under additional pressure. (We do not anticipate the authorities moving towards a more flexible exchange rate policy, and forecast the hryvnia to remain at around USD/UAH8.3 this year following the Russian funding agreement.

By providing an alternative to IMF funding, Russian support may enable the authorities to delay fiscal adjustment and structural reforms until after the elections. The revised 2014 budget, passed last week, raised the consolidated budget deficit target by 1.6pp of GDP to 4.3%.

The December agreement saw Russia agree to provide USD15bn in financing (the first USD3bn tranche was received at the end of the month) and cut gas prices (from USD400/bcm to USD269/bcm in 1Q14). This will enable Ukraine to meet its external sovereign debt repayments due this year and ease pressure on the current account, but external finances remain a key credit risk that the Russian deal only eases temporarily.

Ukraine would face a refinancing hump in 2016 if the remaining USD12bn of issuance were disbursed this year and had the same maturity as the two-year bonds issued to Russia in December. It is doubtful that Ukraine could borrow enough in the market to smooth out its repayment profile, so Russian rollovers would be necessary.

And while the current account deficit will fall from around 8.6% of GDP, looser fiscal policy will offset some of the benefits of a lower gas import bill, keeping the deficit high at around 7% of GDP. This would mean Ukraine would continue to accumulate external debt. Reserves are forecast to rise to USD24bn in 2014, but they will still barely cover three months of imports.

We discussed our credit view on the Ukraine on a conference call yesterday, which is available at www.fitchratings.com. Readers are also referred to the special report ‘Ukraine: Russian Lending Offers Short-Term Reliefa, published 17 January.

We rate Ukraine a€˜B-a with a Negative Outlook. Our next scheduled ratings review is due on 28 February.

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