S&P affirms Ukraine B- foreign currency rating with stable outlook

S&P Global Ratings affirmed its “B-“ foreign currency rating for Ukraine (“B” local currency) with stable outlook, the rating agency reported on May 12. S&P’s action is based on “improved macroeconomic fundamentals and significant progress made in financial and energy sector reforms,” a sharp decline in inflation and the continuing program with the IMF.

The rating’s stable outlook is based on S&P’s expectation that Ukraine will maintain access to funds from international donors in the next 12 months, which depends on the adoption of pension and land reform by the Ukrainian parliament. The agency could consider an upgrade of Ukraine’s rating if economic growth will exceed its expectations (it sees 1.9% and 2.8% real GDP growth in 2017 and 2018) and if there is no deterioration in Donbas.

Large scheduled Ukrainian government debt repayments in 2017-2020, which S&P estimates at over USD 20 bln, or 21% of Ukraine’s 2017 GDP, are “key drag on the ratings.” The agency expects that Ukraine will smoothly repay its USD 2.6 bln debts in 2017 and USD 3.9 bln debts in 2018, given support from international donors, available international reserves and the government’s ability to borrow. At the same time, repayments of USD 7.5 bln due in 2019 are less certain, S&P concluded, as they will “remain dependent on the government’s ability to pass the reforms required by the IMF.” Among other risks, S&P sees “large contingent liabilities” of Ukraine, which include USD 3 bln due to the Russian government and some possible obligations which may arise from Naftogaz’s litigation with Gazprom.

The agency expects Ukraine will receive the next tranche from the IMF in the second half of 2017, “if Ukraine progresses with key land and pension reforms.” It also highlights the uncertainty about land reform “given strong vested interests and the degree to which some opposition parties are not in favor of the reforms.”

Alexander Paraschiy: We share S&P’s view that the Ukrainian economy has stabilized and reforms are in progress. Also we recognize that pension and land reform are vital for Ukraine to remain within the IMF program. We also share the concerns of the S&P analysts about the uncertainty with land reform – we see a risk that discussions around the format of the land reform might take more time than initially expected. At the same time, we believe the approaching hardship with debt repayments in 2019 is the main reason that will pressure the authorities to keep complying with IMF requirements.