NEW YORK, Aug 22 (Reuters) - Fitch Ratings on Friday downgraded Ukraine’s local currency sovereign credit rating one notch to CCC from B-minus, citing an ongoing political transition and fighting with Russian-backed separatists for wreaking havoc on its economy.
“Instability in the east and disputes with Russia are affecting the economy,” Fitch said in a statement. Fitch also affirmed its CCC foreign currency sovereign credit rating.
Ukraine elected billionaire Petro Poroshenko its new president in May. This follows the ouster of former President Viktor Yanukovich, who drew protests after spurning a deal to move closer to European integration at the last minute, having come under pressure from Russia. Moscow sees Ukraine under its sphere of influence.
Poroshenko, upon election, vowed to end the conflict with the pro-Russian rebels who have occupied large areas of eastern Ukraine. The conflict however has escalated.
“Although the government has recaptured territory from the rebels, conflict may persist or intensify, delaying economic revival and damaging productive assets,” Fitch said.
On Friday, a convoy of Russian trucks sent by Moscow on a humanitarian mission but looked upon as suspect by both Kiev and Washington made a unilateral decision to cross the border without authorization, escalating the tensions.
Ukraine is bolstered by a $17 billion bailout fund from the International Monetary Fund. It received the first $3.2 billion tranche in May as part of the two-year aid package intended to short up depleted foreign currency reserves and support the state budget.
Fitch forecasts real gross domestic product shrinking at least 6.5 percent in 2014, ”much worse than the agency had expected in February, and assumes zero growth in 2015 and 2016.
Citing a deterioration in Ukraine’s government solvency, Fitch said the consolidated fiscal deficit should reach 10 percent of GDP this year.
“The reserves position remains fragile and only public foreign-currency borrowing under the IMF programme stands in the way of a renewed external financing crisis and probable default,” Fitch said, noting how the Ukrainian currency, the hryvnia, has depreciated more than 37 percent against the U.S. dollar since the end of 2013.
“The government has budgeted up to 30 billion hryvnia (1.5 percent of GDP) to support state banks, private banks and the deposit guarantee fund. Fitch believes eventual recapitalisation needs could be higher,” the firm said. (Reporting By Daniel Bases; Editing by Chizu Nomiyama)