Ukraine Debt Rating Cut by Fitch as Foreign Funding Squeezed

Ukraine’s credit grade was cut to the same level as Greece and Cyprus by Fitch Ratings, which cited the eastern European nation’s strained external finances.

Fitch lowered its assessment of Ukraine’s long-term foreign and local-currency sovereign debt rating one step to B-, six levels below investment grade, according to a statement today from London. It assigned a negative outlook, indicating the rating may be cut further into junk territory.

The decision “reflects an increasingly fragile external financing position and constraints on the sovereign’s ability to borrow in foreign currency to refinance heavy external debt repayments through 2014-2015,” Fitch said in the statement.

Ukraine is in the midst of its third recession since 2008 amid falling global demand for products such as steel, a widening current-account gap, shrinking foreign reserves and trade restrictions from Russia. Fitch’s move is Ukraine’s second downgrade this month after Standard & Poor’s cut its credit grade to B- on Nov. 1. Moody’s Investor Service lowered its rating to Caa1 in September.

The cost of credit-default swaps to insure Ukrainian debt against non-payment for five years jumped 15 basis points to 1,009 as of 7:26 p.m. in the capital, Kiev, after surging to 1,089 points on Sept. 27, the highest since January 2010. The yield on Ukraine’s benchmark dollar bond due 2023 climbed 18 basis points to 9.83 percent.

Locked Out

With yields approaching 10 percent, Ukraine “effectively” has no access to international bond markets, according to Fitch. That puts the government’s plan to raise $4 billion in international bond markets in 2014 at risk, it said.

Ukraine has failed to agree on International Monetary Fund financing of about $15 billion in more than a year of talks, with officials rejecting demands by the lender to cut household heating subsidies as President Viktor Yanukovych prepares for elections in 2015.

Ukraine’s economy shrank for a second quarter between July and September as industrial production plummeted amid weaker demand for exports such as steel. Gross domestic product fell 0.4 percent from the previous three months after contracting 0.5 percent between April and June. The economy will stagnate this year and will grow 1.5 percent next year, Fitch forecasts.

Foreign reserves fell to $20.63 billion in October, the lowest since 2006, from $21.94 billion the previous month, data released yesterday showed.

Losing Confidence

With net external capital flows unlikely to be sufficient to finance the current-account gap, reserves will decline further, “increasing the risk of a loss of domestic confidence and sharp exchange-rate depreciation,” Fitch said.

Ukraine is seeking to sign an association agreement with the European Union at a Nov. 28-29 summit, a step that’s angered Russia and triggered threats of trade blockages. The deal is not certain, with the 28-member bloc seeking the release of jailed ex-Premier Yuliya Tymoshenko, whose conviction it’s described as selective justice.

“If Ukraine fails to sign the” agreement with the EU, “they face a real risk of a full-blown economic and financial crisis,” Tim Ash, chief emerging-market economist at Standard Bank Group Ltd. in London, said by e-mail. “It’s struggling to finance twin deficits in an increasingly challenging global financing environment. Signing the agreement is the only way out for Yanukovych.”

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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