Moody`s Investors Service has confirmed several key credit ratings of Ukraine, concluding a review for possible upgrade that began in March, and has maintained a positive outlook on these same ratings, according to a Moody`s press-release, forwarded to UNIAN. The decision not to upgrade the ratings that were under review but rather to keep a positive outlook takes into account an upcoming period of political and economic uncertainty, set against the much-improved sustainability of the government`s debt metrics and relatively consistent fiscal policy.

Moody`s said the positive outlook applies to the B1 foreign- and local-currency government bond ratings, the country`s Ba3 foreign-currency ceilings for bonds and the B2 country ceiling for forreign currency bank deposits. The A3 (stable outlook) local currency country ceiling and Baa1 (stable outlook) local currency bank deposit ceiling have been affirmed. Also affirmed are the Not Prime short-term ratings for country ceilings for foreign currency bonds and bank deposits.

"Moody`s expects there will be difficult days ahead for Ukraine given its heightened external financing needs in the context of global market volatility," said Moody`s Vice President Jonathan Schiffer. "Still, a positive outlook was judged to be appropriate because Ukraine has accumulated a large foreign reserve cushion after many years of strong economic growth and earlier current account surpluses."

Schiffer said this cushion would likely allow Ukraine to navigate a period of large current account deficits without serious financing stress, but the related uncertainty is sufficiently large that an upgrade did not seem to be warranted at this time.

Moody`s does expect, however, that foreign direct investment (excluding any privatization receipts) will cover around 80% of the current account deficit this year and half of next year`s, although it will not finance the entire shortfall, as in previous years.

Other positive factors noted by Schiffer were the healthy growth in government revenues, which has contributed to a significant improvement in payments capacity indicators since 1999, and a more balanced distribution of economic growth between domestic and external sources.

"Tax -- including customs -- administration has improved and, combined with appropriate policy measures, provides the potential for additional revenue gains over the medium term," said Schiffer. "The government`s balance sheet has been strong for quite some time, and the approach to fiscal policy by various center-right and center-left coalition governments suggests a high degree of consensus among Ukraine`s political elites."

In spite of substantial rises in minimum wages and social transfer payments, Schiffer projected that Ukraine will continue to register quite modest budget deficits, with the country`s accession to the WTO and restructuring of the industrial base likely to help offset other growth challenges coming from higher energy costs. Contingent liabilities associated with the state gas distribution corporation, Naftogaz, and with compensation to the populace for so-called "lost savings" from the hyperinflation that accompanied the fall of the Soviet Union are manageable.

"The very high rate of inflation, caused by strong domestic demand coupled with rising food and energy prices and lax macroeconomic policies," said Schiffer, "will likely abate gradually over the next two to three years, as the domestic harvest improves and fiscal policy stays relatively tight."

Schiffer said that Ukrainian politics remains fiercely contested between the three major political parties, and suggested that the relationship between parliamentary power and presidential prerogatives seems to require constitutional clarification.

"Nevertheless, there is little perceived threat to the parliamentary democratic regime," said Schiffer. "A change of government or the potential election of a new president in autumn 2009 is not seen as a harbinger of wholesale shifts in political-economic direction or challenges to macroeconomic stability. The populace has adjusted their behavior accordingly, lessening the risk of financial crises."

Schiffer suggested that there are two key policy variables that Moody`s will be monitoring. The first is the ability of the National Bank of Ukraine to adjust monetary policy to cool an overheating economy in general and, in particular, to adopt a more appropriate and flexible exchange rate regime to deal with the myriad economic pressures associated with Ukraine`s further development. The second relates to the government`s fiscal policy reaction to the slowdown in growth and the significant widening of the current account deficit as elections approach.