S&P downgrades Ukrainian bonds to B-, negative outlook

Standard & Poor’s lowered its long-term foreign and local currency sovereign credit ratings on Ukraine to B- from B, the agency reported on November 1. S&P also affirmed Ukraine’s short-term ratings at B. The ratings of all Ukrainian Eurobond issues were lowered to B- as well. S&P kept its outlook negative for all ratings.

Among the reasons for the downgrde, S&P analysts listed political uncertainty, financial sector stress, and weak external liquidity. In particular, the S&P release referred to a 26% YTD decline in NBU reserves in 9M13, increased use of foreign exchange controls this year and an increased possibility of hryvnia devaluation. S&P also stressed increased uncertainty on Ukraine signing the EU Association Agreement and renewing its relationship with the IMF.

The agency also estimated a probability of above 33% exists that Ukraine’s ratings will be further downgraded in the coming 12 months if its net foreign currency reserves decline faster than the agency expects.

Alexander Paraschiy: This is actually what we were anticipating (refer to our news from October 30) given that the goverment has repeatedly postponed solving its external liquidity and budget consolidation problems instead of introducing reforms.

At the same time, we expected the downgrade would happen a bit later. Given that there is a high risk that NBU reserves will demostrate a record drop in October or November, we see a good chance that the S&P will further downgrade Ukraine’s rating already this year.