S&P assigns Ukraine`s upcoming $1 bln Eurobond issue `BB-` rating

17:25, 09 November 2006
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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.

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