Moody’s upgrades Ukraine sovereign rating to Caa2 with positive outlook

Moody’s Investors Service announced on Aug. 25 it has
upgraded the Ukrainian government’s credit rating to Caa2 from Caa3 and its
rating outlook to positive from stable. It also raised the country’s ceiling
for foreign currency bonds rating to Caa1.

In its rating action, Moody’s referred to 1) “impact
of reforms” in the natural gas and banking sectors, public procurement system
and taxation and 2) “significant strengthening of Ukraine’s external position,”
namely an increase in Ukraine’s gross international reserves to USD 17.8 bln as
of end-July from USD 5 bln in early 2015, mostly the result of IMF loans and
other multilateral lenders.

Moody’s attributed its positive outlook to “the
momentum of reforms that, if sustained, could lead to further improvements in
Ukraine’s public and external debt sustainability.”

Moody’s also highlighted that Ukraine still has a risk
of servicing external debt, with a significant repayment burden in 2019-2021
that “will require additional foreign currency funding beyond what official
lenders are likely to provide.” It also warned on the risks from the war in
Donbas, as well as the uncertainty that can come from parliamentary and
presidential elections scheduled for 2019, which add risks to “ongoing
compliance with the IMF program.”

Alexander Paraschiy: This is
positive news for the Ukrainian government, which was awarded for its reform
efforts in selected areas. But this will change little for Ukraine’s sovereign
risk as Moody’s Ukraine ratings still remain two notches below the marks of two
other top agencies, Fitch and S&P, which rank Ukraine at B-. Moreover,
Moody’s made it clear that Ukraine can only count on its Caa1 rating in the
near future, even with it being far below investable ratings.

The recent revision will most likely lead to upgraded
ratings of state banks Oschadbank (OSCHAD) and Ukreximbank (EXIMUK) to Caa2. It
may also result in an upgrade of Ferrexpo’s (FXPOLN) rating to Caa1 soon.