Next Ukrainian government has limited time for key reforms, says Fitch
A looming external financing gap and the prospect of presidential elections in 2015 mean that the next Ukrainian government has limited time to deliver key reforms following the October 28 parliamentary elections, Fitch Ratings said in a statement on Thursday.
While commenting on the preliminary results of the elections to the Verkhovna Rada, the agency said that despite a strong showing by opposition parties, including UDAR, the Party of the Regions is the largest single party and it should be able to form a working majority with other parties and independent lawmakers.
According to Fitch, Ukraine's external financing position is precarious, despite its ability to access the bond markets this year. The 12-month current account gap has widened to 8% of the GDP, due to the impact of weak external demand. Pressure on the exchange rate has increased, with domestic demand for foreign currency rising, while foreign exchange reserves fell by $3.1 billion since the end of 2011 to $ 27 billion, or three months of current account payments, the agency said.
Fitch forecast that external financing requirement would grow in 2013, as repayments to the IMF will rise to $6 billion. Fitch believes this probably exceeds the government's capacity to borrow externally and will require partial refinancing by the IMF itself.
"Getting the IMF deal back on track would reduce the refinancing risk, boost investor confidence and so underpin continuing market access. It would also force the government to resume fiscal consolidation and address underlying structural economic and financial weaknesses," the agency's statement reads.
The agency noted that last year, the Ukrainian parliament approved an unpopular pension reform package, as demanded by the IMF program, but did not carry out a second promised rise in household gas prices. This caused the IMF to freeze its $15 billion stand-by arrangement.
Steep rises in gas import prices in recent years have made energy subsidies a significant burden on Ukraine's public finances, with the IMF estimating the cost of natural gas-related transfers from the government to households at 6% of GDP, Fitch said.
"It was always likely that unpopular reforms would be delayed until after the parliamentary elections, which were held on October 28. But Ukraine's record of domestic political considerations overriding policy commitments to international financial institutions suggests this pattern could be repeated ahead of the 2015 presidential election. Effectively, there may be little more than a year to enact these reforms," the press release reads.
Widespread expectations of depreciation are reflected in Fitch's forecast of the hryvnia exchange rate of UAH 8.80/$1 by end-2012, but the Ukrainian currency may weakens even further. A weaker currency would increase the burden of external debt, and lead to higher inflation, Fitch said. Continuing to defend the hryvnia would be likely to see forex reserves continue to fall restricting liquidity in the banking system and leading to high interest rates, the agency added.
Fitch noted that it rated Ukraine 'B' with a Stable Outlook.
"The immediate rating outlook remains highly dependent on Ukraine's ability to secure external financing to stabilize reserves, rein in balance of payments pressures and tighten fiscal policy," the press release reads.
The agency assumes the government will be able to re-access IMF funding in 2013. Without this, there is a risk that reserves will continue to fall, and the hryvnia depreciate, which would likely trigger a downgrade, the agency said.