S&P downgrades Ukraine’s Sovereign Rating

Standard & Poor’s announced yesterday that it lowered Ukraine’s sovereign credit ratings: long-term foreign currency rating from BB- to B+ and long-term local currency rating from BB to BB-. At the same time, the transfer and convertibility (T&C) assessment was lowered to BB- from BB. The B short-term local and foreign currency sovereign credit ratings and the uaAA Ukraine national scale rating were affirmed. The 4 recovery rating on Ukraine’s foreign debt remains unchanged. The outlook is stable. According to S&P, “the downgrade reflects the failure of authorities to put into place adequate policy measures to counter rising inflation in Ukraine’s overheating economy.” S&P also lowered Kyiv’s long-term credit rating from BB- to B+ as a result of the sovereign ratings review. Oleksandr Klymchuk: We are quick to add that this announcement should be taken with a grain of salt; particularly with the veracity of such ratings, S&P’s included, called into question in the wake of fallout from their top-rating of CDO issues in 2007. Moreover, in our view, the threats mentioned by the agency had been adequately reflected in the BB- rating. We believe S&P failed to take into account the positive trends supporting Ukraine’s credit profile. Since S&P assigned a negative outlook on its ratings in April 2007, state budget revenues grew by more than 55% yoy in dollar terms, FX reserves are up 45%, while total state debt decreased from 15% to 12% of GDP. The rating action will harden the upcoming placement of sovereign Eurobonds by the consortium of BNP Paribas, JP Morgan and Standard Bank. The market reacted to the news by widening sovereign spreads around 10 basis points. The cost of five-year credit protection grew to 337 bps from 330 bps at Wednesday’s close.