International rating agency Fitch Ratings has affirmed Ukraine’s long-term foreign currency Issuer Default Rating (IDR) (LTFC) at ‘Restricted Default’ (RD) pending the completion of the restructuring of obligations for which Ukraine has already suspended payments or announced that it will suspend them in the future.
“Ukraine’s LTFC IDR will remain ‘RD’ until Fitch makes a determination that the exchange has been completed and normalized with a substantial majority of external commercial creditors,” the agency said in a statement on its website.
Fitch recalled that Ukraine continues the process of restructuring its external commercial debt. Following the successful completion of the Eurobond swap in September 2024, the government ordered to temporarily suspend payments on Cargill’s $0.7bn external commercial loan from September 3, 2024, Ukrenergo’s $825m state-guaranteed Eurobonds from November 9, 2024 and GDP-guarantees from May 31, 2025.
In addition, the agency affirmed the IDR on local loans of “CCC+”. “The higher local currency IDRs reflect Ukraine’s continued servicing of local currency debt as part of the ongoing external commercial debt restructuring process, which confirms our expectation of preferential treatment for local currency debt,” Fitch explained.
It pointed out that the structure of the government bond debt – only 1.3% held by non-residents with an overwhelming share held by the NBU and domestic banks, mostly state-owned – limits Ukraine’s benefits from any restructuring, as it creates potential fiscal costs (including bank recapitalization) and risks to the stability of the financial sector, hindering the development of the domestic debt market.
Fitch expects the war to continue through 2025 within the current broad parameters. “Despite some Russian territorial gains since late 2023, Western military support and strong resolve should allow Ukraine to avoid significant additional territorial losses,” the agency says.
It suggests that the new US administration’s stated goal of ending the war could lead to an agreed ceasefire, but a peace deal is unlikely due to the difficult concessions that would be required from both sides. The parameters of an agreed ceasefire, including security guarantees for Ukraine and territory that would remain under Russian control, remain uncertain, Fitch added.
It estimates that the government budget deficit will remain high at 19.1-19.2% of GDP in 2024-2025, despite recently approved tax increases, due to high defense spending and expected reductions in foreign grants. Significant fiscal consolidation will be limited by the continuation of the war as well as reconstruction costs in the event of a prolonged ceasefire, which is likely to maintain high dependence on foreign financing.
Fitch forecasts Ukraine’s debt to rise to 90.8% of GDP in 2024 from 84.4% in 2023, with 77% of external debt highly concessional and 74% denominated in USD. The agency adds that uncertainty over near-term external financing has eased as the G7 is likely to provide around $50bn in loans backed by proceeds from frozen Russian sovereign assets.
Fitch also expects the current account deficit to widen to 8.4% of GDP in 2024 and 13.6% of GDP in 2025, as capacity constraints (e.g. labor and energy) will restrain export growth. Rising consumer spending, military imports, easing currency restrictions and projected lower subsidies will outweigh the projected decline in imports of services from Ukrainians abroad, the agency added. It estimates that official financing will cover external borrowing needs, with international reserves rising to $42bn in 2024 from $40.5bn in 2023. Fitch also forecasts inflation to average 9.3% in 2025, up from 6.2% in 2024, as rapid wage growth amid labor shortages and skills mismatches could keep price pressures on domestic demand. At the same time, growth will slow to 2.9% in 2025 from 4% in 2024 due to persistent labor and energy shortages. “A durable and credible ceasefire could significantly boost the country’s growth prospects in 2025-2026,” the agency noted.
