Fitch affirms Ukraine B rating with Stable outlook

Fitch Ratings has affirmed its long-term foreign currency
rating of Ukraine at B with a Stable outlook, the agency reported on Sept. 4.
Fitch assesses Ukraine’s macroeconomic policy as credible, with low inflation
and a narrowed fiscal deficit prior to the coronavirus shock. At the same time,
Fitch assesses Ukraine’s external liquidity as low and governance as weak.

It sees Ukraine’s gross international reserves at 4.5
months of external payments, budget deficit at 6.5% of GDP, and state debt
(without guaranteed debt) at 57% of GDP in 2020, which are better than median
for B-rated nations (4.1x, 7.3% and 65%, respectively). It expects that
Ukraine’s budget deficit will decline to 5.4% of GDP in 2021 and 4.2% in 2022,
while state debt (excluding guarantees) will stabilize at 60% of GDP in
2022-2023 and will decline afterwards. It sees Ukraine’s real GDP will recover
to 3.8% growth in 2021 and 3.5% in 2022, after a 6.5% decline this year.

Among the factors that could improve Ukraine’s rating,
Fitch sees faster budget consolidation after the crisis, a sustained increase
in gross international reserves and progress in reforms to improve governance
standards. Among possible triggers for negative rating actions, Fitch sees
extended delays in the IMF program due to reform reversals, worsened public
finances and geopolitical shocks.

Fitch’s rating for Ukraine is in line with that of S&P (B / Stable) and one
notch above that of Moody’s (B3 / Stable).

Alexander Paraschiy: Looking at the balance of possible positive and negative triggers for
Ukraine’s rating, we see a low chance for Ukraine to get any better rating in
the next year. In particular, we see Fitch’s estimates of Ukraine’s budget
deficit for 2020-2021 as too optimistic (for instance, Economy Ministry is
forecasting a budget deficit of 7.5% and 6.0% of GDP in 2020 and 2021, which is
1.0pp and 0.6pp higher than Fitch expects). Hopes for consistent macro policy
and governance reforms are also hard to be realized. All in all, we see the
most likely scenario as being that in one year, Ukraine’s credit rating from
Fitch will remain at the current level, with a Stable or even Negative outlook.