KYIV. Oct 3 (Interfax-Ukraine) – Fitch Ratings has affirmed the city of Kyiv’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at ‘B-‘, reads a posting on the rating agency’s’ website.
“The agency has also upgraded the city’s National Long-Term Rating to A-(ukr) from ‘BBB(ukr)’. The outlooks are stable,” it says.
“The upgrade of the National Rating reflects the city’s consolidated fiscal performance with a continuous surplus before debt variation leading to stronger liquidity. The ratings also factor in a weak institutional framework for subnationals in Ukraine (B-/Stable), still material contingent liabilities and unsettled liabilities on the non-restructured part of Kyiv’s eurobond,” Fitch experts said.
“Fitch projects Kyiv’s budgetary performance will stabilize over the medium term with an operating balance moderately declining to 25% of operating revenue after an exceptionally high almost 40% result in 2016. During H1, 2017, the city recorded a UAH 5.6 billion surplus driven by fast tax revenue growth and much slower expenditure dynamic due to capex concentration in H2, 2017. We expect expenditure acceleration until year-end and forecast a full year surplus of about UAH 2 billion or 5% of total revenue, down from an exceptionally high surplus of UAH 3.7 billion (11.6%) in 2015 and UAH 5.1 billion (13.2%) in 2016,” they stated.
“The surplus before debt variation could narrow to zero in 2018-2019 due to expenditure acceleration and lower revenue growth. High fiscal surpluses in 2015-2016 were achieved amid a high inflation environment and supported by new revenue sources allocated to the city, leading to a rapid increase of tax proceeds that outrun the indexation of major expenditure items,” the document reads.
“Following material fiscal surpluses over the last three years Kyiv’s direct risk has been gradually declining to moderate 32% of current revenue in 2016 from peak of 67% in 2014. However, the debt is fully U.S. dollar-denominated exposing the city to FX risk. As of mid-2017, direct risk consisted of $351.1 million obligations to Ukraine’s Ministry of Finance (MoF), and $101.15 million of the non-restructured part of Kyiv’s $250 million eurobond. Fitch assesses the prospects of non-restructured debt settlement as vague over the medium term, given the slow pace of Kyiv’s negotiations with bondholders and the moratorium that was imposed by central government. Fitch will monitor the pace of Kyiv’s negotiation with bondholders,” Fitch reported.
Liabilities to the MoF arose as a result of the exchange of Kyiv’s $550 million eurobonds into Ukraine sovereign debt in December 2015. According to the terms of debt exchange the city compensates the state budget with the coupon payment related to this debt servicing and should repay the principal in two equal instalments in 2019 and 2020. This exposes the city to refinancing needs of $351.1 million (UAH 9.2 billion at end-Q3, 2017). However, part of this debt will be offset according to recent Ukrainian government decision. In particular the liabilities will be reduced by UAH 1.9 billion (equivalence to Kyiv’s repayment of domestic bonds series G in November 2016), and by the amount of Kyiv’s capex on bridge construction (about UAH 1.1 billion in 2017). Fitch expects the city will continue negotiations with the central government on restructuring the remaining part,” they added.
Kyiv’s contingent risk remains material. The city has issued several guarantees totaling about UAH 2 billion as of mid-2017 to support projects in public transportation, infrastructure and energy saving. Most of the guaranteed loans are euro-denominated and relate to two city-owned companies, Kyivpastrans and Kyiv Metropoliten. The guarantees expire in 2018-2021,” the report says.
“Kyiv benefits from its capital status and remains one of the wealthiest cities in the country, historically accounting for more than 20% of the country’s GDP. Nevertheless, Ukraine’s wealth metrics remain weak by international standards. Ukraine’s economy demonstrated mild restoration in 2016 and Fitch estimates Ukraine’s GDP grew 2.2% y-o-y in 2016 (2015: 9.9% contraction) and expects 2%-3% growth in 2017-2018,” it stated.
“The weak institutional framework governing Ukrainian local and regional governments (LRGs) remains a constraint on the city’s ratings. The framework is characterized by long-lasting political instability and a challenging reform agenda implied by Ukraine’s IMF program. This resulted in frequent changes in the allocation of revenue sources and the assignment of expenditure responsibilities, which hinder the predictability of LRGs’ fiscal policy and its planning horizon remains short,” the agency summarized.
