Moodys downgrades Ukraine to B3, maintains negative outlook

Moody’s Investors Service downgraded Ukraine’s government bond rating to B3 from B2, maintaining a negative outlook, the agency reported on Dec. 5. Moody’s referred to Ukraine’s poor policy predictability (which include a lack of IMF-demanded reforms, inability to negotiate a new gas price with Russia, administrative regulation of the foreign exchange market), concerns on the government’s liquidity (Ukraine needs to repay USD 8.9 bln externally in 2013, which is more than the 2012 repayments of USD 7.5 bln when NBU reserves fell 23% YTD), and a weak economic outlook. A further rating downgrade can occur if Ukraine fails to negotiate with the IMF, its BoP worsens, or if liquidity in the banking system remains limited.

Alexander Paraschiy: While the rating downgrade is bad news in itself, we don’t expect the market to react significantly – Moody’s reasoning contains no new information on the current stance of the Ukrainian economy. We share most of Moody’s concerns but believe the agency’s view on Ukraine’s liquidity is too pessimistic – the government’s declining spending appetite for 2013 adds more certainty that the Cabinet of Ministers will be able to service its external accounts, provided that the situation on the financial markets and global economy will not worsen.  Following the sovereign rating downgrade, the agency is likely to cut the ratings of those Ukrainian bond issuers that currently are rated B2:  Kyiv city (CITKIE), DTEK (DTEKUA), Metinvest (METINV), First Ukrainian International Bank (PUMBUZ), Oschadbank (OSCHAD), UkrExIm Bank (EXIMUK) and Privatbank (PRBANK).