S&P Global Ratings raised its foreign currency long- and short-term sovereign credit ratings on Ukraine to ‘CCC+/C’ from ‘SD/SD’ and the long-term issue rating on the restructured foreign currency bonds to ‘CCC+’ from ‘D’ on August 19.
“The rating action follows the completion of Ukraine’s eurobond restructuring,” S&P said in a press release on its website.
In addition, S&P said that the outlook on the long-term ratings is stable. The agency affirmed our local currency sovereign ratings at ‘CCC+/C’ and raised the national scale rating to ‘uaBB’ from ‘uaBB-‘.
“The stable outlook balances our view of the reduction in Ukraine’s government debt service requirements and our expectation of steady international financial support against risks to Ukraine’s economy, external balances, public finances, and financial stability stemming from the ongoing war,” S&P said.
Its experts said that As a result, Ukraine’s foreign-currency debt repayments have declined by roughly 40% over 2022-2024 to about $10 billion from $16 billion before the restructuring. Repayments now primarily comprise payments on official debt–mostly owed to the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development–and foreign-currency domestic-law bonds, held primarily domestically, including by state-owned banks.
“As a result, the near-term risks to the government’s liquidity position and, more broadly, its capacity to honor commercial debt, including in foreign currency, appear manageable,” S&P said.
At the same time, given the ongoing conflict with Russia, Ukraine’s ability to stay current on its debt is highly dependent on factors largely outside of government control.
The agency estimated Ukraine’s real GDP will contract by 40% in 2022 on the back of collapsing exports, consumption, and investment. “Given substantial damage to physical and human capital, Ukraine’s medium-term growth prospects are uncertain and hinge on regaining a level of territorial integrity and access to the Black Sea, alongside sizable reconstruction efforts,” S&P said.
In S&P latest projections, the 2022 fiscal deficit will be at least 20% of GDP, compared with 3.5% before the conflict.
The agency said that one of the key assumptions behind its rating is that donor fund disbursements, primarily from the United States and EU, will continue in the coming months. S&P added that although the timing and details of the new IMF program remain to be seen, if approved it could further ease government financing pressures, and support confidence and macroeconomic stability.
Regarding the hryvnia exchange rate, S&P expects hryvnia to weaken further, adding to inflationary pressures. Speaking of the quality of banks’ assets, it said the outlook for them challenging, despite Ukraine’s banking system entered the war with adequate liquidity and capital buffers.
S&P added that it could lower the ratings in the next 12 months should the security outlook deteriorate, putting further pressure on Ukraine’s foreign exchange reserve position or the government’s administrative capacity, or resulting in much higher government gross financing needs than we currently anticipate. Absent an escalation of the conflict, material delays in foreign donor support could also lead to a downgrade, S&P said.
“We could raise the ratings if Ukraine’s security environment and medium-term economic outlook significantly improve,” S&P said, describing another scenario.
