Fitch Ratings has affirmed Ukraine's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'B-' with a Stable Outlook, Fitch reported on April 28.

"Ukraine's ratings balance weak external liquidity, a high public debt burden and structural weaknesses, in terms of a weak banking sector, institutional constraints and geopolitical and political risks, against improved policy credibility and coherence, the sovereign's near-term manageable debt repayment profile and a track record of multilateral support," Fitch said.

The issue ratings on Ukraine's senior unsecured foreign- and local-currency bonds have also been affirmed at 'B-' and the sovereign's short-term senior unsecured local currency bonds at 'B'.

Fitch said that international reserves rose to $16.7 billion in early April boosted by the latest IMF disbursement ($1 billion), and the second instalment (EUR 600 million) of the EU Macro-Financial Assistance Programme. Reserves could increase further to $18.1 billion (3.6 months of CXP) by year-end, but Ukraine's external buffers remain weaker than 'B' peers (4 months of CXP). Increased exchange rate flexibility, manageable foreign-currency commitments and moderate external imbalances mitigate near-term pressures on international reserves. FX controls still cushion external liquidity, although they have been gradually reduced.

The continuation of the Fund programme (third review completed) is positive for Ukraine's credit profile, as it supports external financing, underpins confidence and provides reform momentum. However, further disbursements from the IMF and other international partners will depend on progress in the structural reform agenda, which is subject to delays and execution risks. Key reforms benchmarks include pensions, land sales, privatisation and progress in the fight against corruption, Fitch said.

"The IMF programme continues to face risks of reform fatigue and execution delays. The government of Prime Minister Volodomyr Groysman does not currently face risks to governability, but an early start of the electoral season for the 2019 general elections could further slow reform momentum," Fitch said.

External debt repayments to multilateral and bilateral creditors are manageable, and external market debt amortisations resume only in 2019. Some $900 million in cash in Ukraine's treasury provides the sovereign with space to bridge gaps in external disbursements in the short term. Increased access to external financing will be key to meet restructured debt commitments starting in 2019, Fitch said.

Fitch said that general government debt rose to 72% of GDP (84% including guarantees) in 2016, substantially above the 56% 'B' median, partly reflecting the recapitalisation bill for PrivatBank, which is forecast to add 5.6% of GDP to the country's debt burden. Debt dynamics remain subject to currency risks (68% FX denominated).

After the nationalisation of PrivatBank, state-owned banks' (SOBs) share of the banking sector rose to 50% of total system assets. Since 2015, the government has issued UAH151.5 billion (6.6% of GDP) to capitalise SOBs. The NBU has resolved 92 banks since 2014, bringing down the system's total to 93. The NBU has reviewed the assets of 95% of the banking sector. The banking sector has stabilised. Nevertheless, low capitalisation levels and non-performing loans of over 50% of total loans pose risks to macro stability and constrain economic recovery, Fitch said.

Fitch said that a trade blockade with occupied territories in the east will result in wider current account deficits and lower growth. The current account deficit is expected to widen to 4.3% of GDP in 2017-2018 from 3.6% in 2015 due to reduced exports of steel and increased demand for energy imports (coking coal). Improved commodity export prices and increased export volumes from the agricultural sector should mitigate the increase in the trade deficit.

"The unresolved conflict in eastern Ukraine remains a risk for overall macroeconomic performance and stability… We forecast growth to decelerate to 2% in 2017 before picking up to 3% in 2018 on the back of improving consumer demand and investment," Fitch said.

Fitch expects neither resolution of the conflict in eastern Ukraine nor escalation of the conflict to the point of compromising overall macroeconomic performance.

Fitch assumes that the debt dispute with Russia will not impair Ukraine's ability to access external financing and meet external debt service commitments.