Fitch Ratings affirmed Ukraine`s `BB-` long-term foreign and local issuer default ratings (IDR) with a positive outlook, according to Thompson Financial.
The ratings agency also affirmed Ukraine`s `BB-` country ceiling rating and `B` short-term IDR.
`Ukraine`s credit fundamentals are improving owing to solid growth supported by rising investment and FDI. WTO entry in 2008 is positive news, while public debt remains low. However, rising inflation and risks in the banking sector and external finances currently make an upgrade premature,` Fitch said.
Ukraine faces near-term risks to its economic stability from rising inflation, which hit 22 pct year-on-year in February 2008, driven by strong monetary expansion due to unsterilised capital inflows in the context of a fixed exchange rate, with a 34 pct rise in food prices contributing.
The government has said it will restrain its fiscal deficit to 1.5 pct of GDP in 2008 from 2.1 pct originally budgeted to curb inflationary pressures, but this is still a substantial loosening from 0.5 pct in 2007, Fitch said.
Ukraine`s external liquidity also remains weaker than `BB` medians. Strong private-sector borrowing took the stock of gross external debt to 54 pct of GDP by end-2007, well above the `BB` median of 32 pct. Fitch expects the current account deficit to widen to 5.5 pct of GDP in 2008, due to strong imports growth.
Bank credit grew about 74 pct in 2007, a pace which gives rise to concerns over easing loan standards, although the non-performing loan ratio remains stable for now at around 2 pct.
Ukraine`s private-sector credit stock of 58 pct of GDP is already large compared with regional and rating peers, Fitch said. However, rising risks in the banking system are partly mitigated by a growing foreign ownership share. A moderation in external borrowing and credit growth should help to reduce vulnerabilities, but too abrupt a slowdown in capital inflows could lead to funding pressures for banks, the ratings agency said.
Public finances remain a rating strength despite the fiscal loosening projected for 2008. Government debt was just 10 pct of GDP at end-2007.
