Fitch Affirms Ukraine at 'CCC'

Fri Feb 28, 2014 12:07am EST

LONDON, February 28 (Fitch) Fitch Ratings has affirmed Ukraine's Long-term foreign currency Issuer Default Rating (IDR) at 'CCC', and Long-term local currency IDR at 'B-'. The Outlook on the local currency IDR is Negative. The issue ratings on Ukraine's senior unsecured foreign and local currency bonds have also been affirmed at 'CCC' and 'B-' respectively. The Country Ceiling is affirmed at 'CCC' and the Short-term foreign currency rating at 'C'. KEY RATING DRIVERS Political risk remains high and the transition of power has a range of potential outcomes, complicating any firm judgements. Ukraine's ability to obtain external financing will largely depend on how quickly it can form a government that has broad popular acceptance and set out a coherent economic policy programme. Leaders of the interim government have pledged to tackle the economic crisis as a priority and seek IMF and EU funding. However, politicians may struggle to regain confidence and meet policy conditions attached to IMF lending, such as rises in natural gas prices or fiscal tightening. As yet, there are no details on the size or timing of any crisis lending. Viktor Yanukovych effectively abandoned the presidency on 21 February. Former opposition MPs formed a new parliamentary majority together with some of the MPs belonging to the Party of the Regions, who disowned the former president. The parliamentary majority designated a new speaker, Oleksandyr Turchynov, as interim president, called presidential elections for 25 May, and has formed a new government headed by prime minister Arseniy Yatsenyuk. It also replaced the chairman of the National Bank of Ukraine (NBU) and reverted to the 2004 constitution. Relations with Russia, Ukraine's largest neighbour and trade partner, have cooled. Russia does not recognise the new government and has suspended disbursements of a USD15bn loan upon which Ukraine was relying to refinance a heavy sovereign debt repayment schedule. Ukraine is scheduled to make sovereign external debt repayments of USD6bn (including guarantees) in the remainder of 2014. However, debt repayments are relatively light in March-May, before a USD1bn Eurobond matures in June. Political uncertainty has contributed to a weakening in confidence in the Ukrainian hryvnia and exchange rate policy. The NBU's imposition of partial capital controls on 7 February stabilised the currency but this has been short-lived. In recent days, the exchange rate has depreciated towards UAH11:USD, with the NBU announcing a shift to a flexible currency regime. The NBU confirmed that reserves stood at USD15bn on 25 February, down from USD17.8bn at the end of January as a result of external debt repayments, capital flight, household demand for foreign exchange and official currency intervention. Currency depreciation will help external adjustment, but exchange rate overshoot risks financial instability, especially if external financing is not secured in a timely manner. Bank deposits fell 7% in February, with further falls limited by restrictions on transactions. Exchange rate depreciation will hurt asset quality on the one-third of loans in foreign currency and could accelerate deposit withdrawals. Ukraine's 'CCC' foreign currency IDR also reflects the following key rating drivers:- -A weak business environment and poor governance indicators, even relative to the 'B' median. -GDP and inflation volatility are high, reflecting overheating before the global financial crisis and a deep recession in 2008-2009, followed by a slowdown and recession in 2012 and 2013, respectively. -The financial system remains fragile, burdened by non-performing loans (NPLs) of 30%, and represents a contingent liability to the sovereign, even after solvency support since 2008 worth 10% of GDP. -As a result of a weak monetary policy regime and fragile confidence in the hryvnia, dollarisation is high. -Income per head is high (at purchasing power parity), and private sector estimates suggest that up to half of GDP is unrecorded. Human development indicators exceed 'B' median levels. RATING SENSITIVITIES The main factors that individually, or collectively, could trigger a downgrade: -Intensification of political and economic stress so that default on government debt becomes probable. -The main factors that individually, or collectively, could trigger an upgrade: -A return to political stability. -Sovereign access to external financing, leading to reduced pressure on reserves. -A return to sustainable growth and a moderation in fiscal and external imbalances. KEY ASSUMPTIONS -Fitch assumes that the political scene remains uncertain but that Ukraine's territorial integrity is maintained. Contact: Primary Analyst Charles Seville Director +44 20 3530 1048 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Paul Rawkins Senior Director +44 20 3530 1046 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 9 August 2013, are available at www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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