S&P affirms Ukraine B rating, Stable outlook

S&P Global Ratings reported on Sept. 11 it has
affirmed its long-term foreign currency rating for Ukraine at B with a Stable rating
outlook. The risks “from the weak external environment and the potential for a
reversal of past reforms” are balanced by the country’s “external buffers,”
S&P highlighted.

Among the key reform risks, the agency mentioned the
central bank’s possible loss of independence, which could change its monetary
policy and spoil Ukraine’s relationships with key creditors. Respectively,
S&P could lower Ukraine’s ratings in case of “disruptions to funding from
concessional programs or capital markets.”

On its strong side is Ukraine’s increased gross
foreign reserves and strengthened financial stability. S&P said it will
improve Ukraine’s rating in case of faster-than-expected consolidation of
public finances or outperformance of Ukraine’s external liquidity.

S&P expects Ukraine’s real GDP will fall 6.0% in
2020, which will be followed by a 4.0% recovery in 2021 and 3.0% growth in
2022-2023. It forecasts Ukraine’s budget deficit will peak at 7.5% of GDP in
2020, declining to 5.3% in 2021, 3.0% in 2022 and 2.5% in 2023. It forecasts
Ukraine’s usable gross reserves to cover four months of current account
payments on average through 2023.

Recall, a week before, Fitch also affirmed Ukraine’s B
rating with a Stable outlook. Moody’s has Ukraine’s rating one notch lower
than its peers (B3) with a Stable outlook.

Alexander Paraschiy: Like Fitch,
S&P sees the post-crisis lowering of Ukraine’s fiscal deficit next year as
one of the triggers for the update. Meanwhile, S&P expects the deficit will
be 5.3% of GDP in 2021, which is more optimistic compared to the government’s
plan of 6.0%. That said, a rating upgrade from S&P (as well as from Fitch)
is unlikely next year.

At the same time, negative rating triggers – such as
the reversal of reforms – are more likely to happen. While currently we see
little grounds for expecting the central bank to lose its independence, the key
risk, so far, is the reversal of anti-corruption reforms, to which IFIs are
very sensitive. All in all, we see more likelihood for S&P downgrading
Ukraine’s rating than for an upgrade in the next year.