Fitch upgrades Ukraine rating outlook to positive, affirms B

Fitch Ratings has upgraded the outlook
for Ukraine’s Long-Term Foreign-Currency Issuer Default Rating to Positive from
Neutral, while keeping the rating at B, the agency reported on Aug. 6. Ukraine’s
macro fundamentals look better than initially expected, with the country
retaining access to external financing, keeping exchange rate flexibility and
stability and is reducing its leverage, Fitch analysts concluded. They expect
Ukraine’s state debt to GDP ratio will decrease to 50% in 2021, with would be
“below the ‘B’ median of 67.8%.” The recent issue of state international Eurobonds for total USD 1.75 bln
and IMF’s SDR allocation for USD 2.7 bln “provide more financing space to meet
higher budget needs in the remainder of 2021,” the agency reported. Fitch
forecasts Ukraine’s GDP growth will reach 4.1% this year.

Among the factors that could lead to positive rating
actions, the agency listed “greater confidence in the ability to maintain IMF
program engagement” and debt market access, sustained fiscal consolidation, as
well as increased confidence in reforms progress. Among the factors that could
lead to negative rating actions, Fitch listed possible “macroeconomic
instability … stemming from IMF program disengagement,” widening of the
debt/GDP ratio due to  fiscal loosening, weaker GDP growth or currency
depreciation, and political/geopolitical shocks.

Recall, Ukraine is rated B (Stable) by S&P and B3 (Stable) by Moody’s.

Alexander Paraschiy:
Technically, securing Eurobond financing and SDR allocation by the IMF indeed
improve Ukraine’s public debt sustainability and secure the increase of gross
international reserves to levels above previous expectations. However, the
flipside of such money raising is the decreased motivation of the Ukrainian
government to remain fully committed to reform progress, which increases
mid-term risks for the economy. All in all, we agree with the motivation behind
Fitch’s outlook upgrade for Ukraine, but see more likelihood that the 
agency’s next rating move will be negative rather than positive.