Frankfurt am Main, April 04, 2014 -- Moody's Investors Service has today downgraded Ukraine's government
bond rating to Caa3 from Caa2. The outlook on the Caa3 rating is
negative.
The downgrade is driven by the following three factors, which exacerbate
Ukraine's more longstanding economic and fiscal fragility:
1.) The escalation of Ukraine's political crisis, as
reflected by the recent regime change in Kiev as well as the annexation
of Crimea by Russia (Baa1, on review for downgrade).
2.) Ukraine's stressed external liquidity position,
in light of a continued decline in foreign-currency reserves,
the withdrawal of Russian financial support and a rise in gas import prices.
This assessment accounts for the near-term liquidity relief that
the recently agreed IMF staff-level agreement will provide.
3.) The decline in Ukraine's fiscal strength, with
an expected increase in the debt-to-GDP ratio to 55%-60%
by the end of 2014 (from 40.5% at year-end 2013)
due to a sizable fiscal deficit, a significant GDP contraction and
a sharp currency depreciation.
Concurrently, Moody's has also downgraded to Caa3 from Caa2 the
rating of the Ukrainian State Enterprise "Financing of Infrastructural
Projects". The outlook is negative in line with the outlook
on the sovereign rating. The enterprise's debt is fully and unconditionally
guaranteed by the government of Ukraine.
In Moody's assessment, the recent developments in Ukraine
and the resulting material changes to sovereign creditworthiness necessitate
this rating action being released on a date not listed for this entity
on Moody's 2014 sovereign release calendar published, in accordance
with EU Regulation 462/2013 ("CRA").
RATINGS RATIONALE
RATIONALE FOR DOWNGRADE
--FIRST DRIVER: ESCALATION OF UKRAINE'S POLITICAL
CRISIS
The first driver underlying Moody's decision to downgrade Ukraine's
sovereign rating is the escalation of the country's political crisis,
which led to a regime change in late February, followed by the suspension
of Russia's financial support programme. Since then,
Ukraine's relations with Russia have deteriorated further,
as the latter lent its support to a local referendum in Crimea which ultimately
led to Russia's annexation of Crimea.
Moody's expects that domestic political risk in Ukraine will remain
high given upcoming presidential elections in May, and the risk
of early parliamentary elections later in the year. Moody's
also sees a significant risk of a further destabilisation of eastern and
southern Ukraine.
The political situation is complicated by a challenging economic environment,
with real GDP projected to decline by around 5%-10%
in 2014. Furthermore, an escalation of economic sanctions
by Russia, with increases in the gas price and potentially escalating
to trade restrictions, would also be detrimental to Ukraine's
economic outlook, given that Russia accounts for almost all of Ukraine's
gas imports, and for around 25% of Ukraine's goods
exports. Whilst it is extremely challenging to assess the probability
of such an event occurring, Moody's considers it sufficiently
material to be a factor in the rating.
--SECOND DRIVER: STRESSED EXTERNAL LIQUIDITY RISK
The second key driver of the downgrade is the increase in the country's
long-standing external liquidity pressures. Following the
escalation of the political crisis, the central bank reduced its
intervention in the foreign-currency market, leading to a
year-to-date depreciation of the hryvnia of around 27%
relative to the US dollar. At the same time, foreign-currency
reserves have declined further to $13.6 billion as of February
2014, which implies import coverage (based on 2013 imports) of only
around 1.6 months, down from 2.4 months six months
ago (September 2013) and 3.2 months in September 2012. Moody's
estimates that Ukraine has around $8 billion in foreign-currency
denominated public debt service for the remainder of 2014, and over
$9 billion in 2015.
Ukraine's short-term external liquidity pressures have been
exacerbated by the suspension of Russia's support package,
which had included (1) an additional $12 billion to be disbursed
during 2014 and 2015; (2) a discount on gas imports. Under
the package, Ukraine would have paid approximately $268.5
per 1,000 cubic meters of gas, but is now likely to face prices
of around $400-$500 (if Russia also unilaterally
ends a discount granted in 2010). Based on the around 28 billion
cubic meters of gas Ukraine imported in 2013, Moody's estimates
that Ukraine would need an additional $3.5-$6.5
billion in foreign currency, compared to conditions under the Russian
support package. Economic contraction and higher domestic gas prices
are likely to lead to a decline in gas consumption, thereby somewhat
alleviating pressures on foreign exchange reserves, but we believe
the impact of higher gas import prices will remain significant.
The IMF recently announced a staff-level agreement on a $14-$18
billion support programme for 2014 and 2015. Securing external
financing from the IMF and other related international financial assistance
limits the risk of an acute foreign-exchange crisis by supporting
Ukraine's public-sector borrowing needs, and by easing
the roll-over of private-sector debt (of which around $60
billion will come due in 2014). However, even if the IMF
package exceeds the proposed Russian package, the difference is
not material against the background of recent developments. In
light of Ukraine's weak track record in complying with IMF programmes
in the past, as documented in IMF research, and the programme's
likely challenging conditionality, as well as the very uncertain
political situation at present, Moody's sees a high risk that
an IMF programme will move off track (i.e., the IMF
halts disbursements) in the coming 12-18 months.
--THIRD DRIVER: DECLINE IN FISCAL STRENGTH,
WITH A SIGNIFICANT RISE IN DEBT-TO-GDP
The third driver underpinning the downgrade is Moody's expectation
that Ukraine's general government debt-to-GDP ratio
will increase to around 55%-60% by the end of 2014,
from 40.5% at the end of 2013. Moody's expects the
rise in debt will be driven by (1) a fiscal deficit of around 6%
of GDP; (2) a sharp economic contraction of around 5-10%
in 2014; and (3) a 20-30% depreciation of the hryvnia
against the US dollar (about 60% of Ukraine's general government
debt is denominated in foreign currency) by year-end.
Furthermore, Ukraine may be required to repay its outstanding Eurobonds
early. The covenants of the $3 billion Ukrainian Eurobond
issued to Russia as part of the financial support package in December
2013 define a debt-to-GDP ratio (state and state-guaranteed
debt) above 60% as an event of default, which could trigger
an acceleration of payments if it were to occur. The acceleration
on the Ukrainian Eurobond in turn could in Moody's view trigger
a cross-default in all other Eurobonds. Subject to definite
legal interpretation, the rating agency sees a material risk that
Russia could call the Eurobond early, thereby causing a liquidity
crisis and ultimately a payment default.
RATIONALE FOR NEGATIVE OUTLOOK
Moody's decision to assign a negative outlook to Ukraine's Caa3 rating
is mainly driven by the continued risk of a further aggravation of the
external liquidity situation, despite the IMF programme.
Given Ukraine's unstable domestic political situation, as
well as the likely unpopularity of the economic reforms attached to an
IMF programme, Moody's considers there to be a high risk that
an IMF programme, if implemented, could move off-track
in the coming 12-18 months. In addition, a further
escalation of the crisis with Russia poses significant downside risks.
WHAT COULD MOVE THE RATING UP/DOWN
Given the negative outlook, Ukraine's sovereign rating is
unlikely to experience upward pressure over the medium term. Moody's
would consider stabilising the outlook on the rating if it were to see
a sustained stabilisation of the political situation along with improvements
in Ukraine's external liquidity position. An upgrade would
be considered against the background of a positive policy track record
with the implementation of structural reforms that addressed Ukraine's
fiscal and external risks in particular.
Moody's would consider downgrading Ukraine's rating if there
was no significant external liquidity support forthcoming, leading
to a significant further decrease in foreign-exchange reserves.
Other factors that would exert downward rating pressure include a deterioration
in Ukraine's balance of payments, rising contingent liabilities
from the banking system, a further deterioration in public debt
metrics, severe economic sanctions by Russia, or a further
escalation of the geopolitical crisis.
COUNTRY CEILINGS
Moody's did not change Ukraine's Caa1 local-currency
country risk ceilings. This is the maximum credit rating achievable
in local currency for a debt issuer domiciled in the country. The
rating agency lowered Ukraine's foreign-currency bond country ceiling
to Caa2 from Caa1. In addition, Ukraine's country ceiling
for foreign-currency bank deposits was lowered to Ca from Caa3.
Short-term foreign-currency country and deposit ceilings
remain unchanged at Not Prime.
GDP per capita (PPP basis, US$): 7,295 (2012
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 0% (2013 Actual) (also
known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 0.5%
(2013 Actual)
Gen. Gov. Financial Balance/GDP: -4.5%
(2013 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -9% (2013 Actual) (also
known as External Balance)
External debt/GDP: 78.3% (2013 Actual)
Level of economic development: Moderate level of economic resilience
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 01 April 2014, a rating committee was called to discuss the rating
of the Ukraine, Government of. The main points raised during
the discussion were: The issuer's fiscal or financial strength,
including its debt profile, has materially decreased. The
issuer has become increasingly susceptible to event risks.
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 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 Caa3; negative outlook
