S&P keeps Ukraine’s lomg-term rating at B-

Standard & Poor’s Ratings Services affirmed its B- long-term foreign currency credit rating on Ukraine with a stable outlook, the agency reported on Dec. 11. S&P had last upgraded its rating on Oct. 19, following a successful vote on the restructuring of Ukraine’s USD 15 bln in Eurobonds (UKRAIN). The latest rating announcement assumes Ukraine will remain “on course with the IMF program, which would mean it will receive a further USD 11 bln in installments by year-end 2018,” the agency reported. Its analysts said they are confident in Ukraine’s near-term ability to meet its borrowing requirements as long as the nation stays in the IMF program. However, they believe Ukraine may face “legal challenges to external bond issuances when the program ends” if creditor disputes are not been resolved by then, in a reference to the USD 3 bln in Eurobonds owned by a Russian state fund. Ukraine may choose to pay or “remain in default until another solution is found or the debt is repudiated”, S&P wrote. The agency rates this particular Eurobond at D, and expects that the IMF will continue to disburse its loans under the external funds facility (EFF) program regardless of the status of this debt.  

S&P foresees an upgrade of Ukraine’s ratings if Ukraine is able to approve reforms to tax policy and tax administration, business conditions and the judiciary system. The upgrade could be also triggered if state banks and Naftogaz will reduce their reliance on state support. The S&P also lists events that could trigger a rating downgrade, stating that they are beyond the base-case scenario: a deepening conflict with Russia, Ukraine exiting the IMF program, the migration of “contingent liabilities” to government debt, or any event that makes a new debt restructuring inevitable.

Alexander Paraschiy: S&P’s reiteration of its rating awarded two months ago, as well as a stable outlook with an optimistic connotation, should be considered as advances being given to the government. The tax reform and 2016 budget, core documents that will define the prospects of Ukraine’s cooperation with the IMF, have yet to be approved by parliament. A real fight against corruption has yet to start, as was highlighted by the U.S. vice president and IMF officials. However, we share the S&P analysts’ optimism, counting heavily on external pressure on Ukraine’s power brokers, that the situation will continue to slowly improve next year.