Standard & Poor’s Ratings Services said it affirmed its ‘BB-‘ long-term foreign, ‘BB’ long-term local, and ‘B’ short-term sovereign credit ratings on Ukraine, reflecting fiscal concerns arising from a shortened electoral cycle. At the same time, the ‘4’ recovery rating on its foreign currency debt, ‘uaAA’ national scale rating, and ‘BB’ transfer and convertibility (T&C) assessment were affirmed. The outlook is negative the rating said in a report issued on August 2.
“Although political risks in Ukraine have subsided in the near-term, the shortening of the electoral cycle continues to interfere with budgetary discipline, the privatization process, and the implementation of critical structural reforms–in particular an overdue tightening of banking supervision,” said Standard & Poor’s credit analyst Frank Gill. “Furthermore, given Ukraine’s high vulnerability to commodity prices, we continue to be concerned by the ongoing deterioration in the country’s non-metals trade deficit.”
At 12% of GDP in 2007, general government debt is well below the ‘BB’ median (40% of GDP). Contingent liabilities are high and rising, however, and there is a lack of transparency surrounding these liabilities. Longstanding political gridlock has deterred progress on privatization, which could increase public sector borrowing needs somewhat this year assuming no further increases in arrears financing. The frequent resorting to arrears-based funding by the general government (and the broader public sector) tends to reinforce Ukraine’s poor credit culture, and undermine its already weak institutions.
Aggressive external leveraging by the financial sector has fuelled the rapid growth of domestic credit, much of it foreign-currency linked. As a consequence, the unhedged liability of households and corporates has increased.
“So far, the National Bank of Ukraine has failed to formulate an effective policy response to very rapidly building private sector credit risks,” added Gill. “In the event of a deterioration in Ukraine’s terms of trade, external liquidity indicators could worsen significantly.”
The ratings continue to be supported by Ukraine’s low general government debt, and by its recent strong record in attracting foreign direct investment. These factors underpin the country’s long-term growth prospects, which remain among the best in the region.
