London, 22 November 2019 -- Moody's Investors Service ("Moody's") has today
changed the outlook on the Government of Ukraine's ratings to positive
from stable. At the same time, Ukraine's long-term
issuer and senior unsecured ratings have been affirmed at Caa1.
The key drivers for the change in the outlook to positive are:
1. The rebuilding of Ukraine's foreign exchange reserves
is reducing external vulnerability in the context of large external repayments;
and
2. The improvement of Ukraine's macroeconomic stability and
the prospect for renewed reform momentum is strengthening the country's
economic resilience.
The affirmation of Ukraine's Caa1 ratings reflects its -- while
showing signs of improvement -- significant external vulnerability.
The sizeable external debt repayments due over the coming years would
-- in the absence of a new International Monetary Fund (IMF) programme
-- require continued market access. At the same time,
the risk of a new flare-up in geopolitical tensions continues to
constrain upward movement in the credit rating at this time.
Concurrently, Moody's has affirmed the Ca rating on the $3
billion Eurobond that Ukraine sold in December 2013. The sole subscriber
of the notes was the Russian government. The bond is under dispute
due to the international armed conflict between the two governments.
The Government of Russia (Baa3 stable) has sued Ukraine for repayment
of the bond in English courts, under whose jurisdiction the bond
was issued, and the case is set for trial.
Finally, Ukraine's long-term foreign currency bond
and deposit ceilings remain unchanged at B3 and Caa2 respectively,
while the short-term foreign currency ceilings for bonds and deposits
remain Not Prime (NP). The country ceilings for local currency
bonds and deposits are also unchanged at B3.
RATINGS RATIONALE
RATIONALE FOR THE CHANGE IN OUTLOOK TO POSITIVE
FIRST DRIVER: REBUILDING OF RESERVES IS REDUCING EXTERNAL VULNERABILITY
IN THE CONTEXT OF LARGE EXTERNAL REPAYMENTS
The first driver for the change in outlook to positive is the notable
strengthening in foreign exchange reserves over the course of 2019,
which is helping to improve the country's external position.
Moody's expects foreign exchange reserves to remain close to their
current levels of around $21.4bn (around 16% of end-2018
GDP), equivalent to more than 3 months of imports, which is
significantly in excess of Moody's previous expectation, set
at the time of the last rating action in December 2018. As a result,
Ukraine's external vulnerability indicator, Moody's
measure of reserve adequacy, is expected to fall to 211%
in 2020 compared to our previous forecast of 354%.
Reserve accumulation has been supported by stronger demand for local currency
bonds from foreign investors amid ongoing fiscal and monetary discipline
as well as Ukraine's improved access to international capital markets
following recent transactions. Financial markets reacted positively
to the orderly political transition following the elections earlier this
year. Foreign investment into local currency bonds, and increasingly
into longer maturities, has been helped by the linking of Ukraine's
domestic debt to Clearstream in May, with the share of total domestic
government bonds held by non-resident investors now standing at
around 22% when excluding National Bank of Ukraine holdings.
The appreciation of the hryvnia over the course of 2019 has also created
room for more substantial market interventions by the central bank aimed
at strengthening foreign exchange reserves.
A new IMF agreement, which is currently under negotiation,
would further support the sovereign's repayment profile in the face
of still large external repayments. Furthermore, in addition
to providing an anchor for structural reforms (see second driver),
a new IMF arrangement would help to unlock associated funding from other
international organisations including the European Union (Aaa stable)
and World Bank, as well as likely further improve access to international
capital markets.
SECOND DRIVER: STRENGTHENING OF UKRAINE'S ECONOMIC RESILIENCE
DRIVEN BY IMPROVING MACROECONOMIC STABILITY
The second driver for the recommendation to change the outlook to positive
is Ukraine's improving macroeconomic stability which -- together
with the prospect for renewed momentum in the reform agenda -- is
supporting a more resilient economic growth outlook.
Inflation has fallen closer in line with the central bank's target,
which has allowed for a gradual easing in monetary policy, and helps
to create the conditions for a stronger and more balanced growth profile.
The economy has been growing for 15 consecutive quarters with the prospect
for the very sharp pick-up in economic sentiment indicators in
recent months to help support higher levels of investment which still
remain lackluster relative to the country's needs. At the
same time, the fiscal position remains prudent, with the general
government debt burden expected to decline to around 54% of GDP
by the end of next year, and will be supported by ongoing modest
deficits with a target 2.1% of GDP outlined in the 2020
budget.
These improvements to macroeconomic stability are also reinforced by the
orderly political transition following the elections earlier this year,
which helps to reduce domestic political event risks.
The election of Ukraine's first single-party majority government,
resulting in a less politically fragmented administration, raises
the possibility for renewed impetus in Ukraine's reform momentum.
In conjunction with the negotiations for a new programme with the IMF,
the Ukrainian parliament has passed numerous pieces of legislation to
progress the government's reform agenda which includes liberalizing
the land market, continuing with anti-corruption reforms
and increasing privatizations. That said, the government's
very ambitious reform targets, including raising annual economic
growth to 7% from 2021, will be challenging to achieve.
In this respect, Moody's considers the new IMF programme would
play an important role in providing not only financial but also technical
assistance with implementing the reform agenda, and serve as an
anchor against backsliding.
RATIONALE FOR AFFIRMING THE Caa1 RATING
The affirmation of Ukraine's Caa1 ratings reflects the country's
significant external vulnerability. While showing signs of improvement,
Ukraine's external position remains weak with large principal and
interest payments on external government bonds due over the coming years.
In the absence of a new IMF programme, these upcoming payments would
require continued access to favourable market conditions. Furthermore,
Ukraine's institutional capacity remains hampered by very weak governance
standards. At the same time, the risk of a flare up in geopolitical
tensions continues to constrain upward movement in the credit rating at
this time.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Moody's takes account of the impact of environmental (E),
social (S), and governance (G) factors when assessing sovereign
issuers' economic, institutional and fiscal strength and their
susceptibility to event risk. In the case of Ukraine, the
materiality of ESG to the credit profile is as follows.
Environmental considerations are material to Ukraine's credit profile
through its marked reliance on the agriculture sector, despite ongoing
efforts at diversification, such that weather related developments
can add to volatility to the country's exports.
Social factors are material to Ukraine's credit profile through
its adverse demographic trends. A persistent demographic drag will
likely constrain Ukraine's scope for strengthening its economic
competitiveness.
Governance considerations are material to Ukraine's credit profile.
Ukraine receives relatively unfavorable scores on the Worldwide Governance
Indicators in the categories of government effectiveness, rule of
law and control of corruption, impeding more robust entrepreneurial
activity and investment.
WHAT COULD MOVE THE RATING UP / DOWN
Ukraine's rating would be upgraded if the progress made in reducing
its sizeable external vulnerability can be sustained, evidenced
by maintaining or further increasing its foreign exchange reserve buffer
in relation to its external repayments. While material progress
on implementing the ambitious reform agenda is not a requirement for Ukraine
to be lifted into the B-rating scale, a further condition
is likely to be reaching an agreement with the IMF and remaining in broad
compliance with the conditions of a new programme, helping to mitigate
the risks posed by Ukraine's large external debt repayments as well
as provide an anchor against backsliding on the reform agenda.
Continued evidence that the spillovers to Ukraine's economic and
fiscal performance from the conflict in eastern Ukraine remains contained,
indicating a reduction in the high geopolitical event risk assessment
which acts a constraint on the rating, would also be positive.
The positive outlook signals that Moody's would expect to draw such a
conclusion, or not, over the next 12-18 months,
and quite possibly within 12 months.
The positive outlook signals that a downgrade is currently very unlikely.
However, the outlook could be returned to stable if Moody's
concludes that the improvements to Ukraine's external vulnerability
will not be sustained. For example, material delays in accessing
new financing which threatens its ability to pay down or refinance its
large external payment obligations, possibly resulting from the
failure to agree a new IMF programme or an inability to remain in broad
compliance with the new agreement, would be negative. At
the same time, a notable reduction in the country's foreign
exchange buffer, which could be accompanied by an outflow of foreign
investors from the domestic market, would support a stabilization
in the outlook. Negative ratings pressure would also derive from
a further escalation of geopolitical tensions that would have a negative
spillover on Ukraine's economic and fiscal profile.
GDP per capita (PPP basis, US$): 9,287 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 3.3% (2018 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 9.8%
(2018 Actual)
Gen. Gov. Financial Balance/GDP: -2.1%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.3% (2018 Actual)
(also known as External Balance)
External debt/GDP: 87.7% (2018 Actual)
Level of economic development: Very Low level of economic resilience
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 19 November 2019, a rating committee was called to discuss the
rating of the Government of Ukraine. The main points raised during
the discussion were: The issuer's economic fundamentals, including
its economic strength, have materially increased. The issuer's
institutional strength/framework, have not materially changed.
The issuer's fiscal or financial strength, including its debt profile,
has not materially changed. The issuer has become less susceptible
to external vulnerability event risks.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in November 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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 certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain 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.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
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.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Evan Wohlmann
VP-Sr Credit Officer
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
