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Concorde Capital Research: Moody’s upgrades Ukraine rating to Caa1 with stable outlook

December 26, 2018 | Cbonds

Moody's Investors Service upgraded its Ukrainian sovereign bond ratings to Caa1 from Caa2, the agency reported on Dec. 21. The three drivers for the rating upgrade were: 1) decreased risk of sovereign default as a consequence of the new stand-by agreement with the IMF, which also increases the likelihood of the country to tap debt markets; 2) an incremental improvement in fighting corruption, which the agency describes as “the most credit-negative institutional weaknesses”; and 3) "an incremental improvement” in the country’s resilience to conflict with Russia. Moody’s also highlighted that the recent escalation near the Kerch Strait “is likely to have a minimal impact on Ukraine's already high geopolitical risks.” Further escalation there is unlikely, Moody’s analysts said.

The agency said it will increase its rating outlook (from “stable”) once it sees further progress in fighting corruption, maintaining fiscal consolidation, as well as reducing “geopolitical tensions.” Among the factors that may lead to a rating downgrade are an escalation of the conflict with Russia, a widening of the budget deficit beyond meaningful limits, and the government limiting the independence of Ukraine’s National Bank and its “monetary and exchange rate framework.”

Alexander Paraschiy: Even after the upgrade, Moody’s rating on Ukraine is one notch below that of S&P and Fitch (B-). It was not the best time for a rating upgrade in our view: in the arguments about incremental progress on the anti-corruption front and on tensions with Russia, the key word is “incremental.” The only overall tangible improvement is renewed cooperation with the IMF, which also enabled the country to receive cheap loans from the EU (EUR 0.5 bln) and will allow it to borrow cheaply under the World Bank’s USD 0.75 bln guarantee. That indeed reduces Ukraine’s default risk, but only for 2019.

Meanwhile, we agree with Moody’s that the institutional independence of Ukraine’s central bank is key for its future financial stability. So far, it looks like a possible victory of Yulia Tymoshenko, or any other populist candidate, in the spring presidential elections will be a key risk for Ukraine’s sovereign rating. So far, we see an even likelihood (at 50/50) that a non-populist president will win the elections (whether it be incumbent Petro Poroshenko or a new face like Sviatoslav Vakarchuk).

Company: Ukraine

Full company nameUkraine
Country of riskUkraine

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