S&P: Ukraine sovereign credit ratings lowered; outlook negative on uncertain effect of IMF package

/Standard & Poor"s, London, October 24, 08/ - Standard & Poor"s Ratings Services today said it had lowered its long-term foreign currency sovereign credit ratings on Ukraine to "B" from "B+", and its local currency ratings to "B+" from "BB-". The "uaAA" national scale rating was also lowered to "uaA+". The outlook is negative. The "B" short-term ratings were affirmed, and the recovery rating on Ukraine's foreign currency debt remains "4". Ukraine's Transfer & Convertibility assessment, which measures the probability of the sovereign restricting access to foreign exchange by non-sovereign debtors, was lowered to"B+" from "BB-". With these actions, the foreign and local currency ratings and the national scale rating on Ukraine were removed from CreditWatch with negative implications, where they were placed on Oct. 15, 2008. "The downgrade reflects the rising cost to the government of a necessary recapitalization of the banking sector against a backdrop of declining growth and heightened exchange rate risk," Standard & Poor"s credit analyst Frank Gill said. A substantial IMF loan facility for Ukraine is likely to be approved relatively soon. In addition to bolstering the foreign exchange reserves of the National Bank of Ukraine, a large loan facility could unlock additional financial support from multilateral development banks and friendly governments, and could lay the foundations for important budgetary and economic reforms. Nevertheless, the necessary political consensus upon which IMF and other concessional lending depends may not come quickly enough to offset mounting pressures on the exchange rate and the financial sector. Moreover, Ukraine's fragile political consensus will likely test the effectiveness of the government's stabilization efforts, even after an IMF program is agreed. Low confidence in Ukraine's financial and monetary institutions increases the associated risks to the real economy and inflation. A sharp depreciation of the Ukrainian hryvnia would also increase the cost to the government of recapitalizing the financial system, not least due to the high level (35% of GDP) of foreign currency loans extended to unhedged corporates and households. The ensuing shock to output would hurt fiscal performance. In the first half of 2008, Ukraine's current account deficit averaged 8% of GDP, but is likely to return toward balance during 2009 as the means to finance it narrow. Short-term financing needs still remain, however. Ukraine's gross external financing requirement (current account balance, amortization of long- term external debt, and stock of short-term external debt) will be 147% of international reserves in the next twelve months. A reversal in Ukraine's terms of trade is also underway, adding further downward pressure on growth prospects in the lead-up to national elections. "The negative outlook indicates that the sovereign ratings on Ukraine could be cut again if there are significant delays in reaching agreement with the IMF, or if the lack of an internal political consensus undermines the government's ability to implement an IMF program,"Mr. Gill said. "Conversely, the outlook on the ratings could change to stable if the government is successful in implementing effective financial stabilization measures that lay the foundation for economic recovery over the next two years." Primary Credit Analyst: Frank Gill, London (44) 20 7176 7129; frank_gill@standardandpoors.com Secondary Credit Analyst: Kai Stukenbrock, Frankfurt (49) 69 33 999 247; kai_stukenbrock@standardandpoors.com Additional Contact: Sovereign Ratings; SovereignLondon@standardandpoors.com [2008-10-24]