Frankfurt am Main, December 15, 2011 -- Moody's Investors Service has today changed the outlook on Ukraine's B2
local- and foreign-currency government bond ratings to negative
from stable, reflecting heightened fiscal funding and external liquidity
risks as well as downside risks to economic growth and political stability.
The negative outlook also applies to the country's B1 foreign-currency
debt ceiling and its B3 foreign-currency deposit ceiling.
The main drivers for the negative outlook include:
1) Increased fiscal and external liquidity risks against the backdrop
of a stalled IMF programme.
2) Downside risks to the economy in the context of a weaker global economy.
3) Increased political risks related to upcoming parliamentary elections
in October 2012.
Moody's has today also changed the outlook to the B2 rating of the Ukrainian
State Enterprise: "Financing of Infrastructural projects",
in line with the sovereign rating action. The Ukrainian State Enterprise:
"Financing of Infrastructural projects" debt is fully and
unconditionally guaranteed by the government of Ukraine.
RATIONALE FOR NEGATIVE OUTLOOK
The primary driver underlying Moody's decision to change the outlook
on Ukraine's government bond ratings to negative is increased fiscal
and external liquidity pressure against the backdrop of the stalled IMF
programme. In the fiscal sphere, this is due to a lack of
reforms in the gas sector, higher-than-expected pension
expenditures, as well as a constrained fiscal reform momentum given
the absence of an IMF "anchor". Furthermore,
the government faces a significant increase in debt redemptions in 2012.
This is of concern given that external markets are currently closed and
demand for domestic debt has been negatively affected by the tight liquidity
situation related to the National Bank's exchange rate policy.
Given that the cash balance of the government is rather limited,
budget financing and debt redemptions could prove difficult in the coming
year.
On the external side, liquidity risks have risen significantly compared
to the levels recorded at the end of 2010. The current account
deficit has more than doubled in USD terms between January and October
2011, compared to 2010. Looking ahead to 2012, there
is still considerable uncertainty surrounding current account developments,
which will be significantly influenced by the new deal on gas import prices
with Russia. Moreover, foreign-exchange reserves have
fallen since August. The external liquidity situation will also
depend on developments related to the IMF programme: so far,
Ukraine has received funds only in 2010, but no disbursements have
been made in 2011.
Secondly, Moody's is concerned about increased downside risks
to economic growth stemming primarily from the deterioration in the global
environment and its impact on exports and capital inflows. A related
factor is the widening current account deficit and the increased FX cash
holdings outside banks, resulting in pressure on the country's
currency peg to the USD. To maintain the peg, the central
bank has absorbed liquidity, which has in turn led to a liquidity
crunch in the interbank market. This has already affected lending
rates, thereby denting the outlook for credit growth. These
downside risks to credit growth are further exacerbated by the high volume
of non-performing loans and the reduced likelihood of foreign banks
supporting their Ukrainian subsidiaries than had been the case during
the 2008-09 crisis.
Thirdly, Moody's decision to change the outlook to negative
was also driven by its view that the upcoming parliamentary elections
in October 2012 pose risks to Ukraine's political stability,
especially if the elections are accompanied by a deterioration in the
country's economy. Opinion polls have for some time been
pointing to a declining popularity of both the ruling party as well as
the President. The external political situation has also deteriorated:
the recent imprisonment of the former Prime Minister triggered condemnation
from the US and the EU governments and has put the signing of a new association
agreement with the EU at risk. In Moody's view, these
developments weaken the outlook for improvements in Ukraine's institutional
environment.
WHAT COULD CHANGE THE RATING UP/DOWN
The ratings could be downgraded in the event of concerns over Ukraine's
fiscal consolidation and external financing and further delays with disbursements
from the IMF programme. Downward rating pressure could also emerge
in the event of a deterioration of the balance-of-payments
situation, continued liquidity shortages in the banking system,
serious asset quality or financing problems, or a deterioration
in external and public debt metrics. Moreover, any regulatory
interventions by the central bank to impose long-term capital controls
and/or undermine bond or deposit contracts could also contribute to downward
rating pressure.
Ukraine's ratings could be upgraded in the event of a more coherent and
consistent approach to economic policy, particularly if this were
successful in reducing the country's large fiscal and external vulnerabilities,
as well as the ambiguity concerning monetary and exchange-rate
policy. Additional positive steps would be improvements in the
administrative efficiency of tax and customs collections that would broaden
the government revenue base, as well as progress on structural reforms
that would support longer-term competitiveness, e.g.
in energy efficiency.
METHODOLOGY USED
The principal methodology used in this rating was Sovereign Bond Ratings
published in September 2008. Please see the Credit Policy page
on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The rating has been disclosed to the rated entity or its designated agent(s)
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parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
this review.
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uses in assigning a rating is of sufficient quality and from sources Moody's
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the lead rating analyst and to the Moody's legal entity that has
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Thorsten Nestmann
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Deutschland GmbH
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Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
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Moody's changes outlook on Ukraine's B2 government ratings to negative from stable
