February 13, 2015 / 9:05 PM / 4 years ago

Fitch Downgrades Ukraine's FC IDR to 'CC'; Affirms LC IDR at 'CCC'

(The following statement was released by the rating agency) NEW YORK/LONDON, February 13 (Fitch) Fitch Ratings has downgraded Ukraine's Long-term foreign currency Issuer Default Rating (IDR) to 'CC' from 'CCC' and affirmed its local currency IDR at 'CCC'. The issue ratings on Ukraine's senior unsecured foreign currency bonds have been downgraded to 'CC' from 'CCC', while the senior unsecured local currency bonds have been affirmed at 'CCC'. The Country Ceiling has been affirmed at 'CCC' and the Short-term foreign currency IDR at 'C'. KEY RATING DRIVERS The downgrade of Ukraine's Long-term foreign currency IDR to 'CC', which indicates that a default of some kind appears probable, reflects the following factors and their relative weights: HIGH The new IMF programme announced on 12 February 2015 will help to close Ukraine's financing gap, but an associated restructuring of privately-held external debt appears increasingly probable. Sovereign creditworthiness has deteriorated. The consolidated fiscal deficit, including losses of state energy company Naftogaz, reached 13% of GDP in 2014. We estimate that direct and guaranteed debt rose to 72% of GDP in 2014. Conflict and economic weakness have led to large additional financing needs beyond those envisaged in Ukraine's IMF programme agreed in April 2014. The escalation of the conflict with rebels in the eastern regions of Donetsk and Lugansk has severely affected the economy. We estimate that real GDP fell 7.5% in 20152014, and forecast a further contraction of 5% in 2015, considerably worse than expected at the time of Fitch's last review in August 2014. The reserves position is precarious, with foreign exchange reserves declining to just 1.3 months of imports in January 2015. The hryvnia fell almost 50% against the dollar in 2014, and a further substantial depreciation has occurred in February 2015. This is leading to a sharp external adjustment, mostly driven by a steep contraction of imports. The current account deficit narrowed from 9.1% of GDP in 2013 to an estimated 4.1% of GDP in 2014, and will fall further in 2015. MEDIUM Banks have been heavily affected by economic turmoil and currency depreciation, and also continue to suffer from the overhang of the 2008-09 crisis. The government has budgeted around 2% of GDP for bank recapitalisation in 2015, but in Fitch's view, the costs will be materially higher, putting further upward pressure on public debt. Political transition continues following the ousting of former president Viktor Yanukovych in February 2014. The new government formed in December, following parliamentary elections in October, has expressed a strong commitment to undertake structural reforms. However, political risks to the implementation of reforms are high. RATING SENSITIVITIES The main factors that could, collectively or individually, result in a downgrade are: - Announcement of a restructuring operation with private external creditors. - Failure to make progress on structural reforms leading to a suspension of the IMF programme. - Further escalation of the conflict in eastern Ukraine and intensification of economic stress, such that financing needs increase beyond what external partners are willing to provide and default becomes inevitable. We currently do not envisage a situation in the short term in which the rating would be upgraded. KEY ASSUMPTIONS The ratings and Outlooks are sensitive to a number of assumptions: Ukraine receives timely disbursements from the IMF and retains support from other multilateral organisations and western partners including the EU and the US. Talks with private creditors on restructuring public external foreign currency debt begin. Ukraine does not succumb to a material escalation of incursions into its sovereign territory. Contact: Primary Analyst Charles Seville Director +1 212 908 0277 Fitch Ratings Limited 33 Whitehall Street New York, NY 10004 Secondary Analyst Paul Rawkins Senior Director +44 20 3530 1046 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Ksenia Ivanova, Moscow, Tel: +7 495 956 99 01, Email: ksenia.ivanova@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria', dated 12 August 2014 and 'Country Ceilings' dated 28 August 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Ukraine - Rating Action Report here Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status here ALL 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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