Fitch confirms Ukraine’s B- rating

Fitch Ratings has affirmed its B- long-term foreign
currency rating for Ukraine (UKRAIN) with a Stable outlook, the agency reported
on March 8. On the negative side, Fitch identified the nation’s weak external
liquidity (gross reserves at 3.1 months of current external payments, below the
B median of 3.4), high external financing needs, weak banking sector and
political risks. On the positive side, the agency sees improving macro
stability, declining government debt and improved “bilateral and multilateral
support.” Fitch highlighted that compliance with the new IMF program is key for
Ukraine to remain solvent.

The agency also sees potential for Ukraine to improve
its rating in case its foreign reserves increase, its economic performance
improves (it estimates 2019 real GDP to grow 2.6%), and/or a sustained decline
in its state debt-to-GDP ratio is observed (although the agency admitted that
Ukraine’s leverage is better than B peers’ median). The main factors that could
trigger Ukraine’s rating downgrade are IMF program delays (or its collapse) and
political/geopolitical shocks.  

Alexander Paraschiy: From Fitch’s
comments, we conclude that there is a high probability of its rating or outlook
improvement, providing Ukraine remains committed to the current IMF loan
program and will be able to reach a new program in 2020. At the same time, the
agency sees a risk of Ukraine’s policy changes (which could put under risk the
IMF program) after the presidential and/or parliamentary elections. We agree
that the elections pose risks of uncertainty, but still believe any winner of
presidential and parliamentary elections will have to continue its cooperation
with the IMF.

The biggest risk for the IMF program looks to be
presidential candidate Yulia Tymoshenko, whose chances to become president this
spring have faded in recent weeks. At the same time, we expect that under any
political outcome, Ukraine will face traditional delays in meeting IMF program
requirements, but such delays won’t raise the nation’s solvency risks
materially. All in all, we do not expect any shifts in the ratings of the top
agencies this year.