S&P affirms B- rating on Ukraine international debt

S&P Global Ratings affirmed its B- rating on
Ukraine’s foreign currency debt with a stable outlook, according to the
agency’s Apr. 20 press release. The stable outlook reflects the agency’s
expectation on reforms that will enable Ukraine to get the fifth IMF loan
tranche, S&P said.

The agency said it will consider a rating upgrade in
case Ukraine’s economic growth outperforms the expectations of S&P analysts
and if fiscal and external imbalances will improve. Also, the agency may decide
to upgrade if it concludes that “the security situation in the
nongovernment-controlled areas in Ukraine’s east has stabilized and a further
escalation is unlikely”.

S&P considers “a lack of funding from external
donors” as among Ukraine’s downside risks, as well as the adverse ruling of a
UK court in a legal battle over the payment of USD 3 bln in bonds issued by
Russia. Such a ruling ”might create technical constraints on Ukraine’s ability
to repay its commercial debt” in the worst case scenario, according to the
press release.

S&P analysts see Ukraine’s real GDP growth will
speed up from 2.5% in 2017 to 3.1% in 2018 and 2.9% in each of the next three
years. They see Ukraine’s current account deficit to increase from 1.9% of GDP
in 2017 to 2.6% in 2018-2019 and 2.7% in 2021. They expect Ukraine’s gross
international reserves will grow from USD 18.8 bln as of end-2017 to USD 21.5
bln in 2018, then declining to USD 19.5 bln in 2019 and stabilizing at USD 20.8
bln in 2021.

Interestingly, S&P sees Ukraine’s currency
weakening to UAH 29.5/USD as of end-2018 and UAH 30.5/USD in 2019 (from UAH
28.1/USD in 2017), but the expect that afterwards it will strengthen to UAH
28.8/USD in 2021.

Alexander Paraschiy: We agree
with S&P analysts that few reasons justify upgrading Ukraine’s sovereign
rating today. A delay in IMF cooperation is the key risk currently, while the
upcoming election season creates additional fiscal risks for the country. The
rating agency made it clear that Ukraine’s rating will be downgraded in case
the government fails to meet EFF program requirements, which will significantly
limit the country’s ability to borrow abroad.

S&P’s outlook of Ukraine’s economic growth is more
or less in line with the view of Ukraine’s central bank (below 3% real growth
in 2019-2020), which might be too conservative if Ukraine continues with
reforms in late 2019 and 2020. At the same time, we consider S&P’s view of
the Ukrainian currency strengthening in 2020-2021 as very optimistic.