New York, December 21, 2018 -- Moody's Investors Service ("Moody's") has today upgraded Government of
Ukraine's issuer and senior unsecured bond ratings to Caa1 from
Caa2. The outlook on these ratings has been changed to stable from
positive.
Excluded from the upgrade is the rating on the $3 billion Eurobond
that Ukraine sold exclusively to the Russian government in December 2013,
which is in default due to the military and political dispute between
the two governments. Russia 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. Moody's has affirmed the rating
on that bond at Ca.
The key drivers for the upgrade to Caa1 from Caa2 are the following:
1. The anticipated improvement in external strength as a consequence
of the new Stand-by Arrangement reached with the IMF, including
the likelihood of renewed capital market access that will reduce the risk
of default;
2. Our expectations that recently adopted reforms will make incremental
progress on reducing corruption, one of the country most credit-negative
institutional weaknesses;
3. An incremental improvement in Ukraine's resilience to
the ongoing conflict with Russia.
The stable outlook balances these developments against the fact that Ukraine
is still a country that is heavily dependent on the IMF for funding as
well as for reform impetus. While Ukraine's external position
is improving, its external vulnerability remains high, and
official financial support crucially depends upon the IMF's imprimatur
over the economic policies that the country implements. Furthermore,
the country remains highly exposed to risks of renewed geopolitical confrontation
and disorderly political transition, as well as a change in leadership
that could result in a delay or partial reversal of the reform progress.
Concurrently, Moody's has withdrawn the Caa2 backed issuer rating
of the Financing of Infrastructural Projects (FIP), which had previously
issued debt with the full and unconditional guarantee of the government
of Ukraine. FIP's Eurobonds were restructured at the same
time as the rest of the sovereign Eurobonds were restructured in November
2015. The entity thus currently has no Eurobonds, nor does
it benefit any longer from the government's guarantee. Hence,
Moody's is no longer in a position to apply a credit substitution
approach with respect to the backed issuer rating as the guarantee is
no longer in place. In this context, Moody's no longer
has the needed information to rate the entity and has therefore taken
the business decision to withdraw the rating.
Moreover, concurrent with today's rating actions, Moody's
has raised the country ceiling for foreign currency bonds to B3 from Caa1,
whereas the country ceiling for foreign currency deposits has been raised
to Caa2 from Caa3. Ukraine's short-term foreign currency
ceilings for debt and deposits remain Not-Prime (NP). The
country ceilings for local currency debt and deposits have been raised
to B3 from Caa1. Country ceilings generally determine the highest
rating that can typically be assigned to obligations of an issuer resident
within a given country.
RATINGS RATIONALE
RATIONALE FOR THE UPGRADE OF UKRAINE'S RATINGS TO Caa1 from Caa2
FIRST DRIVER: ANTICIPATED REDUCTION OF EXTERNAL VULNERABILITY SUFFICIENT
TO LOWER THE RISK OF DEFAULT
The first driver for the upgrade is the reduction foreseen in the government's
external vulnerability because of its new $3.9 billion,
14-month Stand-by Arrangement (SBA) reached with the IMF.
An immediate disbursement equivalent to $1.4 billion will
lead directly to a modest replenishment of the central bank's foreign
exchange reserves (boosting them closer to $18.8 billion
at year-end 2018, from $16.7 billion at the
end of November) but more importantly, it will provide the stamp
of approval for the government's macroeconomic and political reforms
that was needed to unblock new funding from other official sources to
the government.
In addition, Moody's expects that the government will be able
to return to the global capital market to sell Eurobonds, potentially
allowing it to extend the maturity structure of their bonds coming due
in 2019-20 and thereby easing its repayment burden. As a
consequence, the new external financing made available to Ukraine
as a result of the IMF agreement will reduce the risk of default in the
next two years, enough to be better reflected in a Caa1 instead
of a Caa2 rating.
The process of agreeing the fourth review of the previous IMF Extended
Fund Facility (EFF), which was replaced by the SBA, was long
and drawn-out. Many criteria needed to be fulfilled in the
review that were domestically controversial and unpopular. In addition,
the country's fragmented parliament needed to approve multiple elements
of these reforms. As a consequence of this delay and others that
had preceded it, Ukraine would have left undrawn roughly $8.7
billion (at current exchange rates) that were scheduled to be disbursed
during the four years of the program had they not finally fulfilled the
terms set in the fourth review of the EFF. By qualifying now for
the SBA, the government has the possibility of cutting that undrawn
amount nearly in half.
Moody's also said Ukraine has a somewhat better chance of completing
at least one of next year's reviews despite being an election year
with presidential and parliamentary elections in March and October,
respectively. The program is designed to allow the authorities
to progress with difficult but credit-strengthening reforms that
will not require parliamentary approval, which might have been problematic
the closer the time comes to the October election.
SECOND DRIVER: EXPECTATIONS THAT RECENT REFORMS WILL GRADUALLY REDUCE
CORRUPTION AND STRENGTHEN INSTITUTIONS
The second driver relates to the recently adopted reforms which Moody's
expects to advance incremental progress on reducing corruption,
one of the country most credit-negative institutional weaknesses.
New, independent institutions focused on combating corruption,
namely the National Anti-Corruption Bureau (NABU), the Specialized
Anti-Corruption Prosecutor's office and more recently,
the Anti-Corruption Court, were created during the course
of the IMF's last program.
The Special Prosecutor's office and NABU are already operational
but in the absence of the relevant court, the prosecutors have tended
to settle cases rather than try them. The court itself will take
months or even years to become operational. Still, parliament's
approval of a truly independent court knocked down a major hurdle in the
comprehensive strategy to tackle corruption that in turn is a critical
element in Ukraine's overall economic and political reform strategy.
Moody's noted that vested interests as well as notions around the
concept of sovereignty were particularly challenged by the anti-corruption
reforms that the government had to adopt in the context of the IMF program,
and these interests remain very strong. Accordingly, conflicts
erupted even between the new institutions, which are proving detrimental
to their progress. The Special Prosecutor's office has opened
multiple criminal cases against the director of NABU. In response,
Western officials who have championed Ukraine's anti-corruption
reforms are defending the work being done at NABU and they have asked
instead for the Special Prosecutor to step down because of suspicion that
he undermined several high-profile corruption investigations.
While Moody's expects these and other clashes between and with the
new anti-corruption agencies to continue as the efforts to eradicate
corruption continue, gradual but slow progress is expected,
at least as long as the government is dependent on multilateral and financial
support. At some stage, the IMF and Western governments anticipate
that such reforms will become more entrenched, but that stage has
not yet arrived, one of the reasons that the rating remains in the
Caa-range.
THIRD DRIVER: IMPROVED RESILIENCE TO GEOPOLITICAL RISK STEMMING
FROM THE CONFLICT WITH RUSSIA
The ramifications of the outbreak of Russian-backed separatist
uprisings in Crimea and the eastern provinces of Luhansk and Donetsk continue
to weigh on Ukraine's economic and fiscal performance, but Moody's
believes these risks are somewhat attenuated at this point. In
Moody's view, therefore, Ukraine's economic resilience
to an escalation of geopolitical risks has modestly strengthened.
Ukraine's government cut off trade with the breakaway regions in
2017, which means that the residual direct risk to economic activity
in areas under Kyiv's control is greatly reduced at this point.
Efforts to complete the economic isolation of the occupied areas in eastern
Ukraine is estimated to have cost around 1% of GDP in lost output,
incurred mainly in 2017. Absent significant escalation of the conflict,
Moody's expects that future economic costs stemming from it will
be related mainly to subdued investment and elevated defense spending.
Russia's more recent seizure of Ukrainian military ships bound for
the port of Mariupol as well as sailors on those ships is likely to have
minimal impact on Ukraine's already high geopolitical risks unless
further escalation takes place, which Moody's thinks is unlikely.
Moody's noted that the de facto blockade of Ukrainian ports on the Sea
of Azov followed months of increasing interference with Ukraine-related
maritime traffic passing through the Kerch Strait. Ukraine's
imposition of limited martial law after this incident has had very little
effect on consumer or investor confidence, as indicated by a very
brief bout of hryvnia depreciation that reversed within days, and
has not disrupted the upcoming presidential election. While interference
with commercial traffic continues, the outright blockade has been
lifted. Should it be reinstated, once again paralyzing Ukrainian
ports on the Azov Sea, downside economic risks for the country are
still manageable because less than 10% of Ukraine's seaborne exports
originate from those ports and their traffic can be largely rerouted through
Black Sea ports.
RATIONALE FOR CHANGING TO THE STABLE OUTLOOK
The stable outlook balances the constructive developments mentioned above
against the fact that Ukraine is still a country that is heavily dependent
on the IMF, other multilaterals and bilateral lenders for funding
as well as for reform impetus. While Ukraine's external position
is improving, its external vulnerability remains high and official
financial support crucially depends upon the IMF's imprimatur over
the economic policies that the country implements. Private sector
investors similarly demand very high yields to provide Ukraine with credit
in the absence of a functioning IMF program. Long delays in meeting
IMF program criteria beyond deadlines suggest that domestic ownership
of economic and political reforms is elusive. Furthermore,
the country remains highly exposed to risks of renewed geopolitical confrontation
and disorderly political transition as well as a change in leadership
that results in partial reversal of its reform progress.
WHAT WOULD CHANGE THE RATING UP/DOWN
Moody's would likely change to a positive outlook to Ukraine's
rating should progress on the anti-corruption reforms gain speed,
with evidence of material improvement in the rule of law and control of
corruption. Also positive would be ongoing fiscal and monetary
discipline such that the macroeconomic situation remains well balanced,
with sustainable reductions in external deficits and timely repayments
of foreign currency debt obligations that would lower Ukraine's
high external vulnerability and further declines in government indebtedness.
A reduction in geopolitical tensions would support these positive trends.
Moody's would likely change to a negative outlook to or downgrade
Ukraine's rating in the event that compliance with the commitments
to keep the primary fiscal balance in surplus are meaningfully compromised
due to overspending during the election season, putting at risk
Ukraine's access to funding and threatening its ability to pay down
or refinance its large debt payment obligations. Negative ratings
pressure would also derive from a further escalation of geopolitical tensions
that would have spillover impact on Ukraine's credit profile,
as well as from government attempts to limit the independence of the central
bank and its monetary or exchange rate policy framework, or otherwise
impair the nascent improvement of Ukraine's banking system.
GDP per capita (PPP basis, US$): 8,754 (2017
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 2.5% (2017 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 13.7%
(2017 Actual)
Gen. Gov. Financial Balance/GDP: -1.4%
(2017 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -2.2% (2017 Actual)
(also known as External Balance)
External debt/GDP: 102.9% (2017 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 December 2018, a rating committee was called to discuss the
rating of Ukraine, Government of. The main points raised
during the discussion were: The issuer has become less susceptible
to event risks. Expectation of an improvement in control of corruption
and institutions.
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 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 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.
Kristin Lindow
Senior Vice President
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
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, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
