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Fitch Rates Ukrainian Eurobonds 'B'

May 29, 2003 | Cbonds

Fitch Ratings, the international rating agency, has assigned a rating of 'B' to Ukraine's prospective USD700 million Eurobond. The rating is in line with Ukraine's Long-term foreign currency rating of 'B', on which the Outlook is Stable.
Fitch said Ukraine's ratings and Outlook reflect the balance between its strong current macro-economic performance, relatively low debt ratios and comfortable external liquidity position on the one hand, set against its unstable political situation, severe structural weaknesses and relatively tight fiscal financing outlook on the other.

This year the agency expects GDP growth of 5%, inflation in single-digits, a stable exchange rate, a current account surplus of 4.5% of GDP and foreign exchange (FX) reserves to rise to USD5.5 billion by end-year (up from USD1.5bn at end-2000). Fitch estimates public debt declined to 34% of GDP at end-2002, from 61% at end-1999 (below the 'B' median of 77%); while net external debt fell to 39% of current account receipts at end-2002, from 79% at end-1999 (below the 'B' median of 137%). Fitch's liquidity ratio, which measures the ratio of liquid assets to liabilities falling due over the next 12 months, has doubled to 129% in 2003 from 62% in 2000. Ukraine's relatively low debt ratios and comfortable liquidity position provide strong and increasing support to its ratings, and a cushion against global or domestically generated shocks.

Fitch said that the main short-term economic vulnerability is budget financing. Encouragingly, the government cut spending and ran a budget surplus of 0.7% of GDP last year to live within its financing constraints. The 2003 budget is based on a modest deficit of 0.8% of GDP. Nevertheless, the step up in external amortisation from USD0.6bn to USD1.1bn (2.4% of GDP) this year and next will make financing quite tight. The Eurobond issue as well as some net domestic borrowing should fill the gap. But there is a risk of a loosening of fiscal discipline ahead of the 2004 elections. Abandoning the further 28% hike in the minimum wage planned for July would be a positive signal. And the negotiation of a precautionary IMF agreement and disbursement of the delayed USD250m World Bank Programmatic Adjustment loan would offer reassurance.

The agency said the risk of political instability is the main constraint on Ukraine's ratings, and will remain quite high until after the presidential elections due in November 2004. However, risks have eased somewhat this year. In April, the Rada (parliament) passed the economic programme of Prime Minister Viktor Yanukovich's government, which means that it cannot dismiss it for one year. Moreover, it did so by a large majority, raising hopes of a more constructive relationship with the executive. Viktor Yushchenko, the pro-reform "Our Ukraine" leader has a commanding lead in the opinion polls for the presidency. However, the powers of incumbency of the oligarch-based administration, fluid alliances and two-round voting contest mean that numerous scenarios are possible. In addition, relations with the US have improved as the US seems to have put aside concerns over alleged radar sales to Iraq after Ukraine offered to send troops, and the OECD has recommended lifting financial sanctions after the Rada passed a new anti-money laundering law. Fitch said Ukraine's serious structural problems such as weak property rights, corruption, excessive regulations, distortionary taxes, poor corporate governance, a weak banking sector and largely unreformed natural monopolies are key rating weaknesses. Vested interests are strong, and the agency expects little progress this side of the presidential elections. After that, a pick up in structural reforms will be necessary if Ukraine is to generate sustainable growth over the medium-term, raise living standards, create a more diverse and resilient economy and maintain debt service capacity.

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