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Ukraine Ratings to Improve If Utility Bills Rise, Citigroup Says

July 25 (Bloomberg) -- Ukraine’s credit ratings may be raised if the government increases utility prices to meet the International Monetary Fund’s demands, Citigroup Inc. said.

Increasing utility bills, including natural-gas prices for consumers, is the only obstacle delaying the third payment of the country’s $15.6 billion bailout from the Washington-based IMF, Citigroup said today in an e-mailed report to clients.

“A hike in gas tariffs could unlock IMF financing and trigger a rating upgrade,” Natalia Novikova, a Moscow-based analyst for Citigroup, said in the report.

The IMF has withheld payments to Ukraine since March because of delays in approving steps to rein in the budget deficit, which swelled to 7.9 percent of gross domestic product last year. Fitch Ratings changed the outlook on Ukraine’s debt rating to positive from stable last week after parliament changed the nation’s pension law, leaving utility prices as the only outstanding IMF demand.

Natural-gas prices are central to Ukraine’s effort to narrow the deficit because below-market rates contribute to losses at the state-owned gas company.

Inflation probably won’t exceed 12 percent this year, even with a 20 percent to 30 percent increase in gas prices, according to Novikova.

Ukraine’s economy “performed strongly” in the first half of the year, the analyst said. GDP will probably grow 4.8 percent in 2011, according to Citibank.

The central bank’s steps to tighten bank liquidity and the monetary base will help increase demand for the hryvnia, Ukraine’s currency, in the short term and “help prevent further acceleration of core inflation,” the bank said.

While the hryvnia will strengthen slightly this month and in August because of seasonal conditions, it will probably decline to 8.2 per dollar year-end after large payments on foreign debt, according to Citigroup. It traded at 7.994 as of 12:04 p.m. today in Kiev, the Ukrainian capital.

To contact the reporter on this story: Kateryna Choursina in Kiev at kchoursina@bloomberg.net;

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net

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