January 17, 2014 / 1:15 PM / 4 years ago

RPT-Fitch: Russian lending to Ukraine offers short-term relief

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Jan 17 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings says in a new report that Russia’s provision of external financing and cheaper gas supplies to Ukraine significantly reduces the risk of a sovereign external liquidity crisis in 2014. However, it also allows Ukraine to continue to run unsustainable fiscal and external deficits, building up public and external debt, and creates a hump in debt repayments in 2016.

Ukraine received the first USD3bn tranche of a promised USD15bn in Russian financing on 24 December 2013 and plans to place a further USD12bn in Eurobonds by end-2014. The schedule and amount of borrowing is still being discussed. If realised, this would be more than sufficient to refinance USD6.7bn in sovereign external debt repayments in 2014, although the government will still need to borrow elsewhere to finance a widening fiscal deficit of up to 7% of GDP.

Ukraine’s external financing position remains fragile. The current account deficit (CAD) widened to around 8.6% of GDP in 2013. Lower gas prices could be worth 2% of GDP to the current account, and will reduce the import bill, but Fitch expects looser fiscal policy to offset some of these gains, keeping the CAD at 7% of GDP. Although reserves will rise in 2014, on the assumption that all planned Russian financing is disbursed, reserve coverage will remain well below three months of imports.

Fitch now expects the exchange rate to hold at USD/UAH8.3 through 1H15. Although the authorities could in theory take advantage of relief from external pressure to float the hryvnia, Fitch considers this unlikely ahead of the April 2015 presidential elections.

In a revised version of the long-delayed 2014 budget, the government has loosened its fiscal stance and will target a consolidated budget deficit of 4.3% of GDP, up 1.6pp of GDP from the previous draft. Under the widest measure of general government and including Naftogaz losses, the fiscal deficit exceeded 6% of GDP in 2013 and will widen in 2014.

The report, entitled ‘Ukraine: Russian Lending Offers Short-Term Relief’ is available at www.fitchratings.com or by clicking the link below.

Link to Fitch Ratings’ Report: Ukraine: Russian Lending Offers Short-Term Relief


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