S&P affirms B- rating for Ukraine with stable outlook

S&P Global Ratings affirmed its foreign currency
rating for Ukraine at B- with a stable outlook, according to the agency’s Nov.
10 press release. The rating “remains constrained by Ukraine’s large external
refinancing risks, which necessitate continued compliance with Ukraine’s IMF
program,” the agency commented.

The stable outlook reflects S&P’s view that Ukraine
will maintain its access to international official lending by “pursuing the
required fiscal, financial, and economic reforms.” More specifically, S&P
analysts expect Ukraine will be able to secure next year the next loan tranches
under the IMF’s EFF program. S&P identified the key requirements for the
next tranche as pension reform (already approved),
a new law on privatization (passed in the first reading last week),
as well as two yet-to-do steps: establishing of an anti-corruption court and an
energy rate hike, which is an adjustment of domestic natural gas prices to
international benchmarks. They also highlighted that land reform “will likely
be a prerequisite for one of the next IMF reviews” of the EFF program.

Among the downside risks to its rating, S&P listed
the inability to implement IMF-demanded reforms, the risk of “sizable
contingent liabilities” on the government balance sheet, and the risk of the
central bank’s independence being called into question.

Alexander Paraschiy: We share
the rating agency’s view that Ukraine’s cooperation with the IMF will be vital
for its macroeconomic stability and debt sustainability. We also share its view
that continued cooperation with the IMF is very likely next year, with at least
one tranche likely to arrive.

However, the likelihood of any further tranches is
very low, given that parliament approving the launch of a farmland market – as demanded
by the IMF – will be close to impossible during the election campaign season.
That said, we share the rating agency’s optimism about Ukraine’s debt
sustainability for the next year, while still seeing high risks for sovereign
debt in 2020-2021.