17:11 16.12.2013

Fitch: Ukraine protests increase pressure on credit profile

3 min read
Fitch: Ukraine protests increase pressure on credit profile

The duration and scale of anti-government protests in Ukraine has put additional pressure on the country's credit profile, the Fitch Ratings agency has reported,

"The longer the standoff goes on, the greater the risk that political uncertainty will raise demand for foreign currency, cause inward investment to dry up, or trigger capital flight, causing additional reserve losses and increasing the risk of disorderly currency movement," reads an agency report.

"Developments over the weekend suggest the crisis is some way from resolution, as the opposition hardens demands for a change of government. Between 150,000 and 200,000 protestors gathered in Kyiv, according to press reports," Fitch stated.

"Even if the immediate crisis was defused and protests ended, political uncertainty would persist. The government would still be likely to find it hard to resolve the diplomatic challenge of building closer relations with the EU while placating Russia. The demonstrations resulted from the halting of preparations for an EU Association Agreement (AA) last month. European Commissioner for Enlargement and European Neighborhood Policy Stefan Fule said this weekend that the EU and Ukraine were 'further and further apart' in discussions on reviving the AA. Meanwhile, on Tuesday Ukraine may sign a trade agreement with Russia that stops short of joining the Customs Union," reads the agency report.

"Other potential outcomes would be unlikely to reduce near-term political uncertainty. If the government fell, there would be a hiatus while a new administration took shape. A violent crackdown may create splits within the government. Political fragmentation may be a risk, as support for the government appears to be ebbing among some of Ukraine's wealthiest businessmen, who wield considerable political influence," the Fitch experts said.

"Ukraine President Viktor Yanukovych said last week he would seek to restart IMF talks, which would be a credit positive. An IMF deal would ease refinancing risk ahead of heavy external debt repayments in 2014-2015 and help the economy recover (GDP fell 1.3% yoy in Q3, 2013). But the authorities' intent is uncertain and agreement looks unlikely without a politically difficult U-turn on household gas tariffs," they stated.

"Russia may be willing to provide access to financing, but we would not expect it to fully address external financing risks. Furthermore, Russian support could intensify the political crisis," reads the report.

"Ukraine's 'B-' rating incorporates a high degree of tolerance for political uncertainty. The key question remains how the crisis will affect Ukraine's fragile external financial position, which is a key ratings weakness. The National Bank reserves fell further in November, to $18.79 billion from $20.6 billion in October, and are now below 2.5 months of imports. Interest rates rose sharply as the National Bank sought to tighten hryvnia liquidity," Fitch reported

"A 'B-' rating already indicates that material default risk is present, with a limited margin of safety. The negative outlook reflects the risk of that margin being further eroded. Continued marked decline in international reserves, caused for example by an upsurge in capital flight, a sharp currency devaluation (which would damage public and private sector balance sheets encumbered by foreign-currency debt) or reduced confidence that Ukraine will be able to meet its external financing needs would be likely to trigger a downgrade," the experts summarized.

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