Moody’s upgrades Ukraine rating to Caa1 with stable outlook

Moody’s Investors Service upgraded its Ukrainian
sovereign bond ratings to Caa1 from Caa2, the agency reported on Dec. 21. The
three drivers for the rating upgrade were: 1) decreased risk of sovereign
default as a consequence of the new stand-by agreement with the IMF, which also
increases the likelihood of the country to tap debt markets; 2) an incremental
improvement in fighting corruption, which the agency describes as “the most
credit-negative institutional weaknesses”; and 3) “an incremental
improvement” in the country’s resilience to conflict with Russia. Moody’s also
highlighted that the recent escalation near the Kerch Strait “is likely to have
a minimal impact on Ukraine’s already high geopolitical risks.” Further
escalation there is unlikely, Moody’s analysts said.

The agency said it will increase its rating outlook
(from “stable”) once it sees further progress in fighting corruption,
maintaining fiscal consolidation, as well as reducing “geopolitical tensions.”
Among the factors that may lead to a rating downgrade are an escalation of the
conflict with Russia, a widening of the budget deficit beyond meaningful
limits, and the government limiting the independence of Ukraine’s National Bank
and its “monetary and exchange rate framework.”

Alexander Paraschiy: Even after
the upgrade, Moody’s rating on Ukraine is one notch below that of S&P and
Fitch (B-). It was not the best time for a rating upgrade in our view: in the
arguments about incremental progress on the anti-corruption front and on
tensions with Russia, the key word is “incremental.” The only overall tangible
improvement is renewed cooperation with the IMF, which also enabled the country
to receive cheap loans from the EU (EUR 0.5 bln) and will allow it to borrow
cheaply under the World Bank’s USD 0.75 bln guarantee. That indeed reduces
Ukraine’s default risk, but only for 2019.

Meanwhile, we agree with Moody’s that the
institutional independence of Ukraine’s central bank is key for its future
financial stability. So far, it looks like a possible victory of Yulia
Tymoshenko, or any other populist candidate, in the spring presidential
elections will be a key risk for Ukraine’s sovereign rating. So far, we see an
even likelihood (at 50/50) that a non-populist president will win the elections
(whether it be incumbent Petro Poroshenko or a new face like Sviatoslav
Vakarchuk).