Moody’s upgrades Ukraine outlook to positive, affirms Caa1 rating

Moody’s Investors Service upgraded its Ukrainian
government rating outlook to Positive from Stable, keeping unchanged its Caa1
rating, the agency reported on Nov. 22. The two drivers for the outlook
improvement were: 1) the rebuilding of Ukraine’s foreign exchange reserves,
reducing external vulnerability in the context of large external repayments;
and 2) the improvement of Ukraine’s macroeconomic stability and the prospect
for renewed reform momentum, strengthening the country’s economic resilience,
Moody’s said.

The reasons for keeping the rating unchanged were a)
Ukraine’s significant external vulnerability, with large principal and interest
payments on external government bonds due in the coming years; b) Ukraine’s
institutional capacity remaining hampered by very weak governance standards; and
c) the risk of a flare up in geopolitical tensions continuing, the agency
remarked.

Moody’s Positive rating outlook means the agency will
decide, in the next 12-18 months and possibly within 12 months, whether or not
it will upgrade its Ukraine rating. Such an upgrade will be possible if Ukraine
makes progress with the issues Moody’s mentioned as the factors behind keeping
the country’s rating unchanged at the time (external vulnerability, some steps
along the reform agenda, evidence of reduced risks from the conflict in eastern
Ukraine), the agency said.

Reaching an agreement with the IMF and remaining in
broad compliance with the conditions of a new program will help to mitigate the
risks posed by Ukraine’s large external debt repayments, as well as provide an
anchor against backsliding on the reform agenda, Moody’s remarked.

Conversely, (1) a failure to agree upon a new IMF
program or to remain in broad compliance with a new agreement, (2) further
escalation of geopolitical tensions with a negative effect on Ukraine’s
economic and fiscal profile, or (3) Moody’s concluding that improvements to
Ukraine’s external vulnerability will not be sustained, will result in a
downgrade in the agency’s outlook and possibly its rating of Ukraine, Moody’s
said.

Alexander Paraschiy: Moody’s
rating on Ukraine remains two notches below that of S&P and Fitch (B),
which is frustrating but in line with Moody’s traditionally being more
conservative on Ukraine. We view the agency’s decision to upgrade its outlook
to be in line with the realistic expectations of this decision and neutral for
Ukraine’s sovereign and corporate Eurobonds.