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Rating Action:

Moody's downgrades Ukraine's sovereign rating to Caa2; assigns negative outlook

31 Jan 2014

Frankfurt am Main, January 31, 2014 -- Moody's Investors Service has today downgraded Ukraine's government bond rating to Caa2 from Caa1 and assigned a negative outlook. This concludes the review for downgrade that Moody's initiated on 20 September 2013.

The decision to downgrade Ukraine's sovereign rating is driven by the following three factors:

1.) The escalation of social and political tensions in the country, and the associated risk of a severe administrative crisis and/or prolonged political uncertainty.

2.) The increased risk of a sharp rise in external liquidity needs due to rising demand for foreign currency by the Ukrainian population amid the political crisis and the recent weakening of the domestic currency.

3.) Heightened uncertainty regarding the predictability of the external liquidity support from Russia.

Moody's decision to assign a negative outlook on Ukraine's Caa2 sovereign rating is driven by the continued risk of an external liquidity crisis, even if external support from Russia were to be disbursed as planned this year. This reflects Moody's view of a limited likelihood that the Ukrainian government would be in a position to address effectively the country's underlying structural issues.

Concurrently, Moody's has today also downgraded the rating of the Ukrainian State Enterprise "Financing of Infrastructural Projects" to Caa2, and assigned a negative outlook, in line with the sovereign action. The enterprise's debt is fully and unconditionally guaranteed by the government of Ukraine.

RATIONALE FOR DOWNGRADING THE RATING TO Caa2

The first driver underpinning Moody's decision to downgrade Ukraine's sovereign rating is the escalation and increasingly violent nature of the crisis that began with peaceful public protests in the capital city of Kiev in November 2013. The hardened positions between the government and the opposition and the spread of anti-government protests to the country's western regions have increased the likelihood of a severe administrative crisis, potentially involving a power vacuum and protracted political uncertainty. The recent resignation of Ukraine's prime minister, who has been a longstanding ally of the president, is evidence of the underlying pressures in the political regime.

The second driver of the downgrade is the increased risk of a sharp rise in external liquidity needs in light of rising foreign-currency demand by Ukraine's population stemming from the political uncertainty and the weakening of the domestic currency. While the Ukrainian central bank's ability to manage a currency depreciation may continue to benefit from the Russian support package, the escalation of the crisis has increased the risk of a large scale conversion to foreign currency.

The third driver of the downgrade is the increased uncertainty regarding the external support from Russia. If a potential regime change were to lead to a rapprochement of Ukraine with the European Union, Moody's believe that the Russian authorities' willingness to disburse the remainder of the promised $15 billion support package will be sharply reduced. While Russia's support package would, were it to be fully dispensed, allow Ukraine to cover its public external liquidity needs until the presidential elections in March 2015, the resignation of Ukraine's prime minister and the risk of forced early presidential elections add significant complexity and unpredictability to the relationship between the two countries.

Russia disbursed the first tranche of funding in December 2013 via the purchase of $3 billion in Ukrainian Eurobonds with a coupon of 5% and a two-year maturity but, in Moody's view, the conditions associated with future disbursements of the Russian support package are now subject to significant uncertainty.

Russia had promised a $15 billion support package at the time when Ukraine decided to abandon its plans to sign an EU Association Agreement. The size of the support package corresponds to the extent of support that Ukraine was previously seeking to obtain from the IMF (which would have predicated such support on the introduction of a more flexible exchange rate, higher domestic gas prices for households as well as fiscal consolidation). Russia additionally promised to reduce Ukraine's gas import prices to $268.5 per 1,000 cubic meters starting in the first quarter of this year, down from over $400 previously. The reduced import gas prices are subject to periodical reviews by the Russian authorities.

RATIONALE FOR NEGATIVE OUTLOOK

Moody's decision to assign a negative outlook on Ukraine's Caa2 rating is mainly driven by the continued risk of an external liquidity crisis, even if Russia's support package were to be disbursed as planned. This is due to the limited likelihood that the Ukrainian government will be in a position to address the country's underlying structural issues, which, in Moody's view, could eventually further increase Ukraine's adjustment needs.

WHAT COULD MOVE THE RATING UP/DOWN

Given the negative outlook, Ukraine's sovereign rating is unlikely to experience upward pressure in the medium term. Moody's would consider stabilising the rating if it were to see credible and sustained improvements in Ukraine's external liquidity position and political stability. An upgrade would be considered against the background of a positive track record with the implementation of structural reforms addressing in particular Ukraine's external and the fiscal risks.

Moody's would consider downgrading Ukraine's rating in the event of (1) an escalation of the political crisis with further increasing violence and the consequent negative impact on the country's economy; (2) a full withdrawal of Russia's financial support; or (3) a significant 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 or a deterioration in public debt metrics.

COUNTRY CEILINGS

The local-currency country risk ceilings remain unchanged at Caa1. This is the maximum credit rating achievable in local currency for a debt issuer domiciled in the country. In addition, the rating agency left unchanged Ukraine's foreign-currency bond country ceiling at Caa1. However, Ukraine's country ceiling for foreign-currency bank deposits was changed to Caa3 from Caa2. Short-term foreign currency country and deposit ceilings remain unchanged at NP.

GDP per capita (PPP basis, US$): 7,295 (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: -4.5% (2012 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -8.2% (2012 Actual) (also known as External Balance)

External debt/GDP: 77.4 (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 28 January 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 economic fundamentals, including its economic strength, have 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 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 sovereign rating to Caa2; assigns negative outlook
No Related Data.
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