Frankfurt am Main, September 20, 2013 -- Moody's Investors Service has today downgraded Ukraine's government
bond rating to Caa1 from B3 and placed the rating on review for downgrade.
Today's action was prompted by:
1) Heightened concerns over Ukraine's external liquidity position.
The country's foreign-exchange reserves are already at a
very low level and pressure on reserves is likely to rise due to increased
domestic demand for foreign currency in the autumn and significant foreign-currency-denominated
debt repayments until end-2014.
2) Increased downside risk related to future negotiations with the IMF,
which has negative implications for external liquidity and progress on
domestic economic reform.
3) Increased political and economic risks due to deteriorating relations
with Russia, following expectations that Ukraine will sign an Association
Agreement with the EU at the EU's Eastern Partnership Summit in
November 2013.
The review will focus on (1) the development of foreign-currency
reserves, e.g., driven by the demand from the
population and gas imports, (2) the status of negotiations with
the IMF and (3) the outcome of, and Russia's reaction to,
the EU's Eastern Partnership Summit.
Moody's has also downgraded the rating of the Ukrainian State Enterprise
"Financing of Infrastructural Projects" to Caa1 from B3 and
put the new rating on review for downgrade, in line with the sovereign
action. The enterprise's debt is fully and unconditionally
guaranteed by the government of Ukraine.
RATINGS RATIONALE
--RATIONALE FOR THE REVIEW FOR DOWNGRADE
The primary driver underlying Moody's decision is the further deterioration
in the country's external liquidity position since the last downgrade
in December 2012. Ukraine's foreign-exchange reserves
have fallen by 30% year-on-year to around $19.7
billion at the end of August 2013. This implies a coverage of just
2.3 months of 2012 imports and an External Vulnerability Indicator
(EVI) of around 300% in 2014, which is well above the median
for B1-C rated countries of around 90% (EVI: short-term
external debt + currently maturing medium- and long-term
debt + non-resident deposits over one year/official foreign-exchange
reserves).
Furthermore, the pressure on foreign-exchange reserves is
likely to increase in the coming months due to increased demand from the
domestic population, higher gas imports and downside risks to exports.
Beyond a seasonal increase in the coming months, domestic demand
for foreign currency is likely to be further inflated by increased local
media speculation to devalue the currency. Gas imports are likely
to rise in the coming months given that 2013 year-to-date
imports have fallen short of imports in previous years and are unlikely
to be sustainable at current low levels in the winter months. Lastly,
sovereign foreign-currency-denominated debt service (principal
and interest) amounts to $10.8 billion until end-2014
(including IMF debt due by the central bank). Given that the government's
cash balance (deposits at the central bank and commercial banks) is limited,
at around $1.8 billion in July 2013, and that its
access to international markets is also currently limited, the government
foreign-currency-denominated obligations add to reserve
pressure.
The second driver of today's rating action is Moody's view
that downside risks related to future negotiations with the IMF have increased.
The Ukrainian authorities recently passed legislation to issue treasury
promissory notes, an instrument that the IMF is unlikely to favour
(for more information, please see Moody's Issuer Comment "Ukraine:
Treasury promissory notes highlight wider economic challenges").
In addition, there is discussion domestically to re-introduce
a duty on non-cash foreign-exchange purchases, which
was eliminated under a previous IMF programme. These issues add
to the already stalled progress on highly sensitive key political issues
required by the IMF, including: (1) a rise in domestic gas
prices; (2) a more flexible exchange rate; and (3) fiscal adjustments
and a budget based on realistic assumptions. The president and
ruling party's declining popularity and nearing presidential elections
in March 2015 further add to concerns about reaching agreement on a new
IMF programme as well as keeping it on track.
The third driver of today's rating action is worsening relations
with Russia. Russia has been explicit about its disapproval of
a potential Ukraine-EU Association Agreement, which is due
to be signed at the EU's Eastern Partnership Summit in November
2013. While Moody's views the prospects of signing this agreement
as credit positive for Ukraine in the medium-term given that it
will support Ukraine's institutions, economic and political
reforms, the short-term credit negative impact of a negative
reaction by Russia outweighs these benefits. In this context,
Russia recently restricted (or at least delayed) Ukrainian exports by
increasing non-tariff barriers for several weeks. Given
that Russian exports account for around 25% of Ukraine's
total exports, restrictions could impair economic growth and foreign-exchange
generation. Disagreements with Russia could also extend to other
areas in the economic (e.g., gas imports, gas
prices) or the political sphere, with negative consequences for
Ukraine.
--FOCUS OF THE REVIEW
The review will focus on three main areas: (1) the development of
foreign-currency reserves, which are e.g. driven
by the population's demand for foreign currency and gas imports;
(2) the status of negotiations with the IMF; and (3) the outcome
of, and Russia's reaction to, the EU's Eastern
Partnership summit.
WHAT COULD CHANGE THE RATING DOWN/UP
The rating is currently subject to significant downward pressure due to
concerns about Ukraine's external liquidity. A further decrease
in reserves in the coming months would exert downward pressure on the
rating, as would a lack of an IMF programme by the end of the review
period. A deterioration in Ukraine's balance-of-payments
situation would also exert downward pressure on the rating. Furthermore,
a harsh reaction by the Russian authorities to the signing of the EU Association
Agreement would also increase downward pressure on the rating.
In addition, sustained liquidity shortages in the banking system,
serious asset quality or financing problems, or a deterioration
in public debt metrics would exert downward pressure on the rating.
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.
Given the significant risks facing the country, we see very little
upward potential in the rating in the foreseeable future.
COUNTRY CEILINGS
Moody's has also changed the local-currency country risk ceilings
to Caa1 from B2. This is the maximum credit rating achievable in
local currency for a debt issuer domiciled in the country. In addition,
the rating agency has changed Ukraine's foreign-currency bond country
ceiling to Caa1 from B3 and its country ceiling for foreign-currency
bank deposits to Caa2 from Caa1. These ceilings are lower than
the local-currency ceiling as they also capture foreign-currency
transfer and convertibility risks. Short-term country and
deposit ceilings remain unchanged at NP.
GDP per capita (PPP basis, US$): 7,374 (2012
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 0.2% (2012 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): -0.2%
(2012 Actual)
Gen. Gov. Financial Balance/GDP: -4.6%
(2012 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -8.4% (2012 Actual)
(also known as External Balance)
External debt/GDP: 76.6 (2012 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 18 September 2013, a rating committee was called to discuss the
rating of the Ukraine, Government of. The main points raised
during the discussion were: The issuer has become increasingly susceptible
to event risks. Other views raised included: The issuer's
economic fundamentals, including its economic strength, have
materially decreased. The issuer's fiscal or financial strength,
including its debt profile, has materially decreased.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in September 2013. Please see the Credit Policy 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 rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain 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 certain 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 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 rating action, and
whose ratings may change as a result of this 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.
Thorsten Nestmann
Vice President - Senior 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 Jan Sebastian 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 Caa1 from B3 and places the rating on review for downgrade
