Fitch affirms Ukraine B rating, downgrades outlook to Stable

Fitch Ratings has revised the Outlook on Ukraine’s
Long-Term Foreign-Currency Issuer Default Rating to Stable from Positive and
affirmed the rating at B, according to its Feb. 4 report. The key reason for
the outlook downgrade is “expectations of a more protracted period of
heightened tensions with Russia” which leads to “constrained financing
conditions” for the country and will force its gross reserves to fall. The
Stable Outlook partly reflects the rating agency’s “base case that full-scale
military conflict with Russia will be avoided.” Fitch forecasts that Ukraine
won’t place a new Eurobond this year and will face a decline in gross reserves
to USD 25 bln as of year-end (from USD 30.9 bln as of year start).

The rating agency could lower Ukraine’s rating or
outlook in case of the “materialisation of political/geopolitical shocks, …
Increased macroeconomic instability, for example stemming from IMF program
disengagement,” or increase of the government’s financial leverage “due to
fiscal loosening, weak GDP growth, or currency depreciation.” Positive
revisions are possible in case of “reduced geopolitical risk, sustained
increase in international reserves, greater financing flexibility, or greater
confidence in the ability to maintain IMF program engagement,” increased
economic growth outlook due to progress with reforms, or in case of signs of
sustained fiscal consolidation.

Alexander Paraschiy: The Stable
outlook by Fitch, while looking discouraging for the Ukrainian government,
correctly reflects the current situation: there are few reasons for the agency
to upgrade Ukraine’s rating in the next 12 months.