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Fitch Affirms Ukraine's 'B+' Ratings

December 03, 2003 | Cbonds

Fitch Ratings, the international rating agency, has today affirmed Ukraine's Long-term foreign and local currency ratings at 'B+' and Short-term rating at 'B'. The Outlook on the Long-term ratings remains Stable.

"Ukraine's strong economic performance, relatively low debt ratios and comfortable external liquidity position are continuing to exert upward pressure on its ratings. However, they are being constrained by political risks ahead of the presidential elections scheduled for October 2004" said Edward Parker, a Director in the Sovereign Group at Fitch.

Fitch believes Ukraine's comfortable financial position, as well as the interests of the ruling elite, provides some reassurance that the transition of power from President Leonid Kuchma's ten-year rule can be managed without precipitating severe financial distress. The most likely election results appear to be a victory for either Viktor Yushchenko, the pro-reform former-prime minister, or one of the more market-friendly "oligarchs" such as Prime Minister Viktor Yanukovich or National Bank Governor Serghy Tyhypko. Nevertheless, Fitch cautions that Ukraine's volatile political history, weak democratic institutions and the massive interests at stake mean that the risk of political instability is relatively high, and that adverse constitutional reforms or more negative electoral scenarios remain possible.

Ukraine's economy is continuing to perform strongly. This year, Fitch expects GDP growth of 7%, a current account surplus of 6.5% of GDP, single-digit inflation and foreign exchange reserves to rise to USD7 billion, up from just USD1.5bn at end-2000. The main short-term economic risk is that political manoeuvres could spill over into budget execution. Fitch expects a slight widening in the general government deficit from around 1.6% of GDP this year to about 2% in 2004. But that should not be too onerous to finance, given some privatisation receipts, scope for rapidly growing local financial markets to absorb more domestic debt and access to the international capital markets, as demonstrated by the issuance of USD1bn of Eurobonds this year.

Fitch adds that Ukraine's impressive macroeconomic numbers were continuing to feed through into indicators of creditworthiness. The agency estimates that public debt will fall to 31% of GDP at end-2003, from 61% of GDP at end-1999, well below not only the median of 'B' range sovereigns but also the 'BB' median of 46%. Fitch also estimates that net external debt will decline to 29% of current account receipts, from 79% at end-1999, again below the 'BB' median of 55%. Moreover, Fitch's liquidity ratio (which measures the ratio of liquid assets to liabilities falling due during the next 12 months) is expected to be 175% in 2004, well above Indonesia ('B+') at 115%, Turkey ('B') at 82%, Brazil ('B+') at 72% and its own level of 62% in 2000. This provides vital insurance against external financing risks at a time when Ukraine is off-track with the IMF, dependent on international capital markets for budget financing and vulnerable to political shocks.

The agency said that despite its recent economic recovery, Ukraine is still a poor country with estimated 2003 GDP per capita of just USD970 at market exchange rates, less than half the 'BB' median. It suffers from severe structural weaknesses such as a distorted tax system, weak banking sector, excessive bureaucracy, corruption, poor transparency and governance, and uncertainty over the rule of law. Vested interests are powerful. Greater progress with structural reforms will therefore be necessary after the elections to unlock its potential, sustain rapid economic growth rates, create a more diverse and resilient economy and maintain its capacity for debt service.

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