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Jan 22 (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
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 â€˜Ukraine: Russian Lending Offers Short-Term Reliefa, published 17
We rate Ukraine a€˜B-a with a Negative Outlook. Our next scheduled ratings review
is due on 28 February.