Ukraine's Credit Ratings Raised at S&P After IMF Approval of New Bailout

Ukraine’s credit ratings were raised by Standard & Poor’s after the International Monetary Fund approved a new $15.2 billion loan program for the country.

S&P raised its long-term foreign currency ratings on Ukraine by one level to B+ from B, four steps from investment grade, and the long-term local currency rating to BB- from B+, the company said in a statement late yesterday. The ratings were removed from CreditWatch.

The IMF agreed on July 28 to disburse $1.9 billion immediately, allowing the former Soviet republic to use $1 billion of the first payment to help cover the budget deficit. The government increased gas prices for households and heating companies to balance the finances of state energy company NAK Naftogaz Ukrainy and agreed to trim the deficit to 5.5 percent of gross domestic product this year and 3.5 percent next year.

“We believe that the IMF program will increase the chances of stability-oriented policy measures that should increase the resilience of the Ukrainian economy and its public finances,” S&P’s London-based Kai Stukenbrock said in the statement. “The IMF program also reduces the external vulnerability of the Ukrainian economy by providing external financing.”

Market Reaction

The hryvnia traded at 7.8942 per dollar at 2:04 p.m. in Kiev from 7.8975 hryvnia yesterday. Ukraine’s 6.58 percent bond maturing 2016 rose to 101.053, from 100.000. The country’s Credit-default swaps, which fall as the perception of creditworthiness improves, fell 4 basis points to 514.5, according to data provider CMA.

Ukraine obtained a two-year, $16.4 billion loan from the IMF in 2008 after the global recession cut demand for its exports. The nation received $10.6 billion before payments were frozen in November as the government declined to cut spending ahead of presidential elections at the start of this year.

Ukraine will have to “consistently implement the program with the IMF” to sustain its ratings, Deputy Economy Minister Anatoliy Maksyuta said in Kiev today. The country’s credit grade will “constantly” increase if the “political populism factor is minimized,” he said.

VTB Loan

Aside from covering the budget gap, Ukraine will probably use the IMF funds to refinance a $2 billion loan from VTB Group the government took out last month, said Anastasia Golovach, an analyst at Renaissance Capital in Kiev in an e-mailed note.

The IMF will provide a second $1 billion payment for the state budget after the first quarterly review, the Washington- based lender said. The remaining $13 billion will go to central bank reserves.

The loan “eases concerns over budget financing for this year,” said Tim Ash, head of emerging market research at Royal Bank of Scotland Plc in London, by e-mail yesterday. The program “should enable rational energy pricing, which will do much to help rein in the quasi-fiscal deficit in the energy sector.”

Prime Minister Mykola Azarov initially aimed for a budget- deficit target of 5.3 percent of GDP plus 1 percent to cover funds for Naftogaz. The IMF wants Ukraine to reduce the shortfall to 2.5 percent in 2012.

“Fiscal adjustment will start in 2010 and deepen in 2011- 12, backed by robust structural reforms of the pension system, public administration, and the tax system,” IMF Deputy Director John Lipsky said in a July 28 conference call.

Ukraine’s natural gas industry “will be strengthened, including through domestic price hikes and broader reforms supported by other multilateral institutions, which will help eliminate energy subsidies and create a more modern and viable sector,” he said.

EU, World Bank

Resumed cooperation with the IMF opens the way for a European Commission loan estimated at 610 million euros ($792 million) and for an $800 million loan from the World Bank, Deputy Prime Minister Serhiy Tigipko said on July 7.

Naftogaz’s deficit should be “eliminated starting from 2011,” the IMF said.

“A long-term permanent shift to a more sustainable fiscal position on the back of a permanent improvement in the finances of Naftogaz and the social security system could lead to further ratings improvements,” S&P said.

Setbacks to political stability, higher-than-projected recapitalization needs for the financial system, or the government’s weakening resolve to “finalize an IMF lending program, could put downward pressure on the ratings,” it said.

Market Strength

The IMF’s backing “will be moderately positive” for Ukraine’s Eurobonds “as the approval of the stand-by program has been expected and the market has already accounted for this,” Astrum Investment Management said in a note to clients.

The decision should cause a further decline in the cost of hedging against devaluation risk, Astrum said. This “should increase the appeal of the Ukrainian domestic bond market for non-residents,” according to Astrum.

To contact the reporters on this story: Sandrine Rastello in Washington at Kateryna Choursina in Kiev at;

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