Fitch affirms Ukraine B rating, stable outlook

Fitch Ratings has affirmed long-term foreign currency
Issuer Default Rating of Ukraine at B with a Stable Outlook, the agency
reported Feb. 26. Among possible drivers for rating/outlook upgrade, Fitch
listed increased international reserves (which it sees at 4.5 months of current
external payments as of end-2022) on strengthened BoP, post-COVID fiscal
consolidation that will decrease government debt (to about 54% of GDP in
2021-2022, guarantees excluded) and increased confidence about progress in
reforms. Among possible negative factors for the rating, Fitch listed increase
in macro instability due to delays in the IMF program and reforms reversals,
increase of government debt due to longer period of fiscal loosening, as well
as political/geopolitical shocks.

Fitch sees key Ukraine’s macro parameters being better
than for B-rated peer median, like its GDP decline in 2020 (4.2% vs. peers
4.5%), fiscal deficit (5.5% of GDP vs. peers 7.7%) and debt/GDP ratio (55.6%
net of guaranteed debt vs. peers 63.8%). The agency expects Ukraine’s GDP will
improve to 4.1% real growth in 2021 and 3.8% in 2022. It sees the budget
deficit to reach 5.1% of GDP in 2021 and 3.7% in 2022. It forecasts CPI
reaching 6.9% YTD at the end of 2021 and 5.3% at the end of 2022. Fitch also
expects Ukraine will get one IMF tranche for USD 0.7 bln and other official
loans for USD 1.5 bln in 2021.

Alexander Paraschiy: We agree
with Fitch on the assessment of Ukraine’s rating and most of the agency’s macro
forecasts, including the GDP growth outlook and the expectation that no more
than one IMF tranche arrives this year. Meanwhile, we see little reasons for
Fitch to improve Ukraine’s rating this year, keeping in mind that there is a
risk for the downgrade, if Ukrainian government or courts continue to adopt
decisions that will distance the country from the deal with the IMF. Also, we
see a risk of increasing state-guaranteed debt despite agreeing with Fitch’s
estimates of state debt evolution without guarantees.

Following the affirmation of Ukraine’s sovereign
rating, we expect Fitch will confirm its ratings of most Ukrainian
quasi-sovereign and private Eurobond issuers, with the only risk of downgrading
the outlook or rating for Ukrainian Railways (RAILUA).