By Daniel Bases
NEW YORK, Sept 20 Moody's Investors Service cut Ukraine's sovereign credit rating further into junk category on Friday and warned that more downgrades could come.
Moody's cut the rating by one notch to Caa1 from B3, with the outlook placed on review for downgrade, as it cited concerns over a drop in foreign currency reserves, new debt issuance and potentially worsening relations with Russia.
Ukraine is rated B with a negative outlook by both Standard & Poor's and Fitch Ratings.
"The country's foreign-exchange reserves are already at a very low level and pressure on reserves is likely to rise due to increased domestic demand for foreign currency in the autumn and significant foreign-currency-denominated debt repayments until end-2014," Moody's said in a statement.
The firm also said there was downside risk to the rating from the government's decision to issue Treasury promissory notes, "an instrument that the IMF is unlikely to favor."
"In addition, there is discussion domestically to re-introduce a duty on non-cash foreign-exchange purchases, which was eliminated under a previous IMF program," Moody's said.
In addition, Moody's cited Moscow's disapproval of Ukraine's discussions with the European Union to sign an Association Agreement in November.
"While Moody's views the prospects of signing this agreement as credit positive for Ukraine in the medium-term given that it will support Ukraine's institutions, economic and political reforms, the short-term credit negative impact of a negative reaction by Russia outweighs these benefits," Moody's said.