S&P assigns Ukraine`s upcoming $1 bln Eurobond issue `BB-` rating
Ratings on Ukraine supproted by solid growth prospects
Standard & Poor`s Ratings Services on Thursday assigned its `BB-` senior unsecured debt rating to an upcoming $1 billion Eurobond issue by Ukraine (foreign currency BB-/Stable/B; local currency BB/Stable/B), which will mature in 2016, the ratings agency said in a release.
"The ratings on Ukraine are supported by a strong general government balance sheet, solid growth prospects over the medium term, and a relatively low external debt burden," said Standard & Poor`s credit analyst Moritz Kraemer. "Despite a drawn-out political crisis following the March 2006 elections and the doubling of natural gas import prices earlier in the year, the Ukrainian economy has outperformed expectations."
Growth in 2006 is now forecast to exceed 6%, slowing only moderately in 2007. Foreign direct investment and export performance have also surpassed earlier estimates, demonstrating the economy`s improved resilience against the unpredictable political environment.
Public sector and external solvency indicators have improved markedly since 2000, S&P said. Ukraine`s external liquidity is now comparable with the `BB` median, despite the evaporation of current account surpluses, following adverse terms of trade shocks and buoyant domestic demand. The fiscal improvements that occurred during the growth spurt in the first half of this decade, together with significant privatization receipts, have led to a fall in general government debt to less than 20% of GDP in 2006, one-half the ratio of five years previously and the current `BB` median of 43%.
Prime Minister Viktor Yanukovych, who harbors a conciliatory attitude towards Russia (foreign currency BBB+/Stable/A-2; local currency A-/Stable/A-2), will deliver a measured increase in imported gas prices to market levels and reduce the likelihood of supply shortages, both of which are key to preventing a major slowdown of Ukraine`s fast-growing, but exceptionally energy-intensive economy. Accordingly, import gas prices will increase by slightly more than one- third to a manageable $130 per thousand cubic meters in 2007, far below world market prices, although gas prices are still likely to gradually increase to reach world market price levels.
Nevertheless, the ratings on Ukraine remain constrained by weak political institutions, reversal-prone economic policies, low levels of prosperity, and vulnerability to external shocks.
"The rancorous political environment and the country`s polarized society continue to diminish policy consistency and predictability," Kraemer said. "The prospects for rigorous and coherent implementation of policy reform remain poor over the medium term, while risks of sudden policy reversals loom large."
Ukraine`s banking sector is one of the weakest systems analyzed by Standard & Poor`s Ratings Services and poses an above-average contingent risk to the government, especially given brisk credit expansion: domestic credit is expected to reach 50% of GDP in 2007, from less than 20% in 2002.