Fitch upgrades Ukraine rating to B

Fitch Ratings upgraded the long-term foreign and local
currency ratings of Ukraine to B from B-, keeping its ratings outlook at
Positive, the agency reported on Sept. 6. Fitch attributed the upgrade to
improving macroeconomic stability, declining public indebtedness, “reduced
political uncertainly due to a shortened electoral period” and expected policy
continuity, as well as the government’s “strong stated commitment to structural
reforms.”

Fitch analysts reported that Ukraine’s new Cabinet
“includes technocratic, pro-Western and reform-minded ministers” and expect
that the government will continue cooperation with the IMF and “facilitate
access to official and market financing.” The agency also mentioned Ukraine’s
declining government debt-to-GDP ratio, declining inflation, currency stability
and rising gross foreign currency reserves.

The agency said it will be ready to further upgrade
Ukraine’s rating if its foreign currency reserves grow faster than expected
(USD 21.8 bln in 2019 and USD 22.4 bln in 2021, according to Fitch), and/or the
economy grows faster than expected (Fitch sees real growth of 3.4% in 2019 and
3.2% in 2020), and/or debt declines further than expected (Fitch sees Ukraine’s
state debt-to-GDP ratio at 55.8% in 2019 and 44.4% in 2021), and/or in case of
improved “governance standards.”

Among the key factors that could trigger a decrease in
Ukraine’s rating outlook from positive are possible delays with the IMF
program, political/geopolitical shocks that could worsen economic and fiscal
indicators, a failure to deliver forecasted economic growth and leverage
indicators, as well as “failure to improve standards of governance,” Fitch
reported. Such risks could become realized in case of a reversal of
Privatbank’s nationalization, fragmentation of pro-president’s faction in the
parliament, or the interference of oligarch Ihor Kolomoisky in political
decision-making.

Alexander Paraschiy: This is
definitely an encouraging event, given that Ukraine has not had such a high
rating from Fitch since 2013. However, the positive effect of the rating action
on Ukrainian bond yields will likely be limited, as S&P and Moody’s still
have lower ratings for the government (B- and Caa1, respectively). At least,
Fitch’s rating move might create some pressure on other rating agencies to
consider upgrading Ukraine’s rating on the basis of stable macroeconomic
indicators and improved expectations about the government’s reform agenda.

Most likely, Fitch will also upgrade the credit
ratings of all quasi-sovereign issuers of Eurobonds (Oschadbank, Ukreximbank,
Naftogaz, Ukrainian Railways). It will be also interesting to see whether Fitch
will upgrade the ratings of those companies that enjoyed a
higher-than-sovereign rating before Sept. 6: MHP (one notch higher), Metinvest
and Kernel (two notches higher). If the latter two get a rating upgrade, they
will have highest historical credit rating of Ukraine’s corporate issuers
(BB-).