International rating agency Moody’s Investors Service has downgraded Ukraine’s long-term foreign and local currency government and foreign currency senior unsecured debt ratings to “Ca” from “Caa3” and changed its outlook from “negative” to “stable”.
“The downgrade to ‘Ca’ is due to the effects of the war with Russia, which are likely to create long-term problems for Ukraine’s economy and public finances,” the agency said in a statement Saturday night.
These problems increase risks to government debt sustainability, making debt restructuring highly likely with significant losses for private sector creditors, Moody’s said.
The stable outlook, the release noted, reflects balanced risks at a Ca rating, which corresponds to a recovery in the event of a default, typically between 35% and 65%.
“An end to military conflict leading to a significant resumption of economic activity in the near term could result in fewer losses in the event of restructuring, while losses for private investors could be greater than the ‘Ca’ rating implies in the event of further escalation of military conflict,” the agency adds.
It also downgraded Ukraine’s local and foreign currency ceilings to ‘Caa3’ from ‘Caa2’, noting that the one notch gap reflects significant policy uncertainty and unpredictability in the face of very high geopolitical risks, as well as strong external position pressure.
In its baseline scenario, Moody’s expects the war to be protracted and the economy to register a slight contraction of 2% in real GDP in 2023, followed by a moderate recovery in 2024. Despite the high degree of uncertainty in the development of the military conflict, Moody’s expects macroeconomic and financial stability to be maintained.
According to the agency, the successful implementation of the Monitoring Program involving the IMF Board of Directors could pave the way for a funded program as early as this year, which could cement the necessary policy development and improved governance that will be key to financing post-conflict recovery.
Although prospects for EU accession remain very distant, the accession process will spur institutional reforms and anti-corruption efforts, Moody’s added.
According to its forecasts, the budget will remain under significant pressure in 2023 due to large defense and social spending, although the deficit will decline to 8% of GDP (including grants) from 17% of GDP last year, mainly reflecting spending cuts amid limited availability of financing.
Moody’s also expects the current account surplus of 5.7% of GDP in 2022 to turn into a small negative balance in 2023, largely due to a widening trade deficit reflecting reduced export opportunities and sustained imports, particularly of food, fuel, and repair materials.
Ukraine’s public debt burden is growing rapidly, and risks to the debt trajectory are tending to increase, the document also says. According to Moody’s estimates, the debt-to-GDP ratio increased by almost 35 percentage points (p.p.) to 82% of GDP at the end of 2022, and is projected to exceed 90% of GDP by the end of 2023.
The agency adds that the materialization of contingent liabilities of state-owned enterprises, especially in the energy and financial sectors, although difficult to quantify, creates additional fiscal risk.
As a result, Moody’s expects the public debt dynamics to be unsustainable, raising the possibility of a broader debt restructuring, which would lead to significant losses for commercial creditors as official creditors require private sector participation.
“Although there is considerable uncertainty about the timing and form of the restructuring, debt restructuring has become highly likely in light of the prolonged economic turmoil and large financial costs associated with the war,” the agency said.
