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Ukraine 'B/B' Ratings Affirmedby S&P; Outlook Remains Negative, Reflecting Financing Uncertainties

April 01, 2003 | Cbonds

Standard & Poor's Ratings Services said today it affirmed its 'B' long-term sovereign credit and senior unsecured debt ratings and 'B' short-term sovereign credit rating on Ukraine. The outlook is negative.

"The maintenance of the negative outlook on Ukraine reflects continued financing uncertainties despite some recent positive signals," said Standard & Poor's credit analyst Helena Hessel. "The country's continued financing constraints are purely a fiscal problem, given the strong international reserves (more than $4 billion) held by the National Bank of Ukraine."

Following Standard & Poor's revision of its outlook on Ukraine to negative from stable on Nov. 12, 2002, the government successfully launched a $260 million Eurobond issue in December. Combined with various ad hoc legislative measures allowing additional borrowing on the domestic markets, cutting nonprotected expenditures, and accumulating some payment arrears, this enabled the government to ensure full service of its domestic and external debt in 2002, as expected by Standard & Poor's.

Sovereign domestic and external debt service due in 2003 is estimated to increase to $2.2 billion (including a further Eurobond repayment due in September), of which $600 million will be interest payments. The increase includes a rise in external debt-servicing payments, to $1.6 billion this year from $1.3 billion in 2002.

The 2003 budget, which was recently adopted by parliament, is more realistic than the initial government draft as amended by legislators. In particular, budgetary revenues were adjusted to Ukrainian hryvnia (UAH) 50 billion (about $9 billion), down from an earlier UAH54 billion. Projected privatization revenues, which are intended to finance the targeted budget deficit (0.8% of GDP) as well as debt servicing, have also been reduced significantly, to UAH2.1 billion.

"However, even the new privatization target might be too high," said Ms. Hessel. "Actual privatization receipts were only $131 million in 2002, compared with a planned $1 billion, and the pace of privatization so far this year has already fallen short of projections. As a result of the turbulent domestic political environment, the politically challenging and controversial privatization program is unlikely to accelerate," she added.

Weak policy execution highlights the politically fragmented and indecisive nature of the parliament, and still fragile integrity of the government dominated by President Leonid Kuchma. The new government of Viktor Yanukovich, appointed in early December, has had some legislative successes, but its support base in parliament remains extremely weak. As a result, progress on some politically challenging issues remains stalled--such as a new Tax Code that would overhaul tax exemptions to politically connected companies, the repayment of VAT arrears to exporters, and accelerated privatization. Reflecting these legislative failures, a new program with the IMF has yet to be agreed on. In turn, the lack of an IMF agreement has delayed disbursement of World Bank loans.

Looking ahead, Ms. Hessel added: "In the absence of funds from the IMF and the World Bank, Ukraine is left with a significant financing gap. The government still plans to issue up to $600 million this year. However, uncertainties remain, and securing and implementing a new IMF program would help to maintain the ratings on Ukraine at their current level."

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