Frankfurt am Main, December 05, 2012 -- Moody's Investors Service has today downgraded Ukraine's government
bond rating by one notch to B3 from B2. The outlook remains negative.
Moody's decision to downgrade Ukraine's rating and to maintain the negative
outlook reflects the following key interrelated factors:
1.) A downward revision of Moody's assessment of Ukraine's
institutional strength;
2.) A shortage of external liquidity, which has increased
the risk of a currency and wider financial and economic crisis;
3.) Ukraine's comparatively weak economic outlook.
Moody's has also downgraded the rating of the Ukrainian State Enterprise
"Financing of Infrastructural Projects" to B3 from B2,
in line with the sovereign action. The enterprise's debt
is fully and unconditionally guaranteed by the government of Ukraine.
For additional information on Sovereign ratings, please refer to
the webpage containing Moody's related announcements http://www.moodys.com/eusovereign.
RATINGS RATIONALE
RATIONALE FOR THE DOWNGRADE
The primary driver underlying Moody's one-notch downgrade
of Ukraine's government bond ratings is the rating agency's
assessment of a deterioration in the country's institutional strength,
against the backdrop of poor policy predictability as well as reduced
data transparency. In terms of Moody's sovereign rating methodology,
this is reflected in a changing in the second rating factor "Institutional
Strength" to "very low" from "low to very low".
Poor policy predictability mainly refers to Ukraine's weak track
record in carrying out reforms stipulated in the current as well as past
IMF programmes, the inability to negotiate a new gas import price
with Russia for well over 12 months as well as recent (and past) ad-hoc
administrative measures, in particular on the foreign-exchange
market. Data transparency in Ukraine was already low, but
has worsened more recently in terms of upcoming external debt redemptions
for the economy as a whole, on which the central bank stopped publishing
quarterly updates in January 2012. This lack of transparency is
a particular concern against the background of the country's precarious
external liquidity position.
Our concern about the external liquidity situation is the second driver
of today's decision. The country's foreign-exchange
reserves fell by 23% year-on-year to around USD24.8
billion at the end of October 2012, which implies an import coverage
of just three months. The decline is due to central bank interventions
on the foreign-exchange market in order to stabilise the currency
against the background of a deteriorating current account, increased
external debt service requirments and increased demand for foreign currency
by its domestic population. Notably, the decline occurred
despite the fact that the sovereign was able to tap external markets several
times in 2012. It is highly uncertain if market access remains
available in 2013 when sovereign external debt redemptions and service
rise to USD8.9 billion (including repayments of USD3.5 billion
to the IMF by the central bank) from USD7.5billion in 2012.
Those are large sums compared with the government's cash balance,
which comprises deposits at the central bank as well as commercial banks
of around USD1.8 billion at the end of October. Domestic
market access is also impeded as indicated by the wide yield spread between
the primary and secondary government bond market.
The third rating driver of Moody's downgrade of Ukraine's sovereign rating
is the country's comparatively weak economic outlook over the short
and medium term. As a relatively open economy, the deterioration
of the global economic environment has affected Ukraine's GDP growth,
which turned negative in Q3 2012. Overall, Moody's
expects real GDP growth to slow to 0.5% in 2012 from 5.2%
in 2011. The rating agency forecasts only a modest growth recovery
to 1.5% in 2013, in part due to constrained credit
growth related to the exchange-rate policy of the central bank.
In the medium term, growth prospects are clouded by the slow resolution
of the euro area sovereign debt crisis, fiscal risks in the US and
slower growth in China, all of which affect commodity prices and
demand. Unlike a year ago, Moody's now views 4%
GDP growth in the coming five years as unlikely and instead expects GDP
growth of 2%-3% on average, which also has
negative consequences for Ukraine's fiscal metrics. Moreover,
this scenario assumes the successful implementation of a new IMF programme.
RATIONALE FOR CONTINUED NEGATIVE OUTLOOK
The ongoing negative outlook reflects downside risks to Moody's
central scenario, which importantly assumes a new agreement with
the IMF in the coming months.
WHAT COULD MOVE THE RATING UP/DOWN
The ratings could be downgraded if Moody's concerns over Ukraine's
external liquidity position are heightened, in particular if the
recently announced negotiations on a new IMF programme are not successful
or if a new programme were again to move off-track. Downward
ratings pressure could also emerge following a further deterioration in
Ukraine's balance-of-payments situation, continued
capital outflows, sustained liquidity shortages in the banking system,
serious asset quality or financing problems, or a deterioration
in public debt metrics. Moreover, any regulatory interventions
by the central bank to impose long-term capital controls and/or
undermine bond or deposit contracts would also contribute to downward
ratings pressure.
Ukraine's rating outlook could be changed to stable if Ukraine successfully
carries out reforms as stipulated in a new IMF programme over an extended
period of time. The rating could be upgraded upon successful completion
of a new IMF programme. In general, an upgrade would depend
on a credible, 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.
COUNTRY CEILINGS
Moody's has also changed the local-currency country risk
ceilings to B2 from Ba1. This is the maximum credit rating achievable
in local currency for a debt issuer domiciled in the country. The
rating agency has also changed Ukraine's foreign-currency
bond country ceiling to B3 from B1 and its country ceiling for foreign-currency
bank deposits to Caa1 from B3. These ceilings are lower than the
local-currency ceiling as they also capture foreign-currency
transfer and convertibility risks.
The principal methodology used in these ratings was Sovereign Bond Ratings
Methodology 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 ratings have been disclosed to the rated entities or their designated
agent(s) and issued with no amendment resulting from that disclosure.
Information sources used to prepare each of the ratings are the following:
parties involved in the ratings, parties not involved in the ratings,
and public information.
Moody's considers the quality of information available on the rated
entities, obligations or credits satisfactory for the purposes of
issuing these ratings.
Moody's adopts all necessary measures so that the information it
uses in assigning the ratings is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entities or their related third parties within
the two years preceding the credit rating action. Please see the
special report "Ancillary or other permissible services provided
to entities rated by MIS's EU credit rating agencies" on the
ratings disclosure page on our website www.moodys.com for
further information.
Please see the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%) and
for (B) further information regarding certain affiliations that may exist
between directors of MCO and rated entities as well as (C) the names of
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member of the board of directors of this rated entity may also be a member
of the board of directors of a shareholder of Moody's Corporation;
however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
before Moody's ratings were fully digitized and accurate data may not
be available. Consequently, Moody's provides a date that
it believes is the most reliable and accurate based on the information
that is available to it. Please see the ratings disclosure page
on our website www.moodys.com for further information.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Thorsten Nestmann
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades Ukraine's government bond rating to B3 from B2; maintains negative outlook
