Facing debt service obligations totalling more than USD8 bln over the remainder of 2015 alone, Ukraine's (Ca negative) external liquidity situation is likely to remain precarious for the foreseeable future, Moody's Investors Service said in its updated Ukraine Credit Analysis. The expected restructuring of most of the government's outstanding Eurobonds will constitute a distressed exchange, or in other words, a default by Moody's definition.
Ukraine's liquidity position will likely remain severely constrained in the coming years because of the country's structural current account deficit and weak foreign reserve assets, while the government budget will be stretched by the deep economic contraction and the ongoing costs of the military conflict against pro-Russian separatists in the east of the country, said Moody's.
Ukraine's foreign exchange reserves have nearly doubled following the IMF's disbursement of the first tranche of its new USD17.5 bln four-year economic program, part of a total USD40 bln financing agreement. Still, they remain very low at USD10 bln, or only about 2 months' of imports of goods and services, according to the rating agency.
External financing risks are unlikely to significantly abate, in spite of the government's plan to restructure USD15.3 bln of its private external debt service. This debt operation is intended to allow the government to gradually bolster its foreign exchange reserves, however creditors are likely to resist taking large losses on their bonds and loans.
From a budget perspective, Moody's expects that Ukraine's general government debt-to-GDP ratio will increase to 82% in 2015 from 70% last year, before accounting for the debt restructuring, partly because Ukraine's economy is expected to face another economic contraction as very high inflation continues to weigh on domestic demand this year. In addition, the state-owned oil and gas company Naftogaz Ukrainy will continue to be a drain on the government's fiscal resources for at least two more years even if the plan to eliminate the company's deficit by 2017 succeed. Any economic recovery will depend heavily on how quickly the financial and geopolitical situations stabilize.
