Ukraine’s credit rating was lowered by Moody’s Investors Service as the International Monetary Fund delayed a trip for talks on a third bailout in five years at the former Soviet republic’s request.
Moody’s last night cut its rating one step to B3, six levels below investment grade, citing dim economic prospects. While Parliament approved the 2013 budget today, the Washington-based IMF will visit the capital, Kiev, in the second half of January, instead of tomorrow as planned, allowing a new cabinet to participate after Prime Minister Mykola Azarov resigned.
Ukraine, which neighbors Russia to its east, is seeking IMF aid to meet $10 billion of debt payments due in 2013 and help stabilize an economy that shrank 1.3 percent from a year earlier in the third quarter. President Viktor Yanukovych dismissed the Cabinet Dec. 3 after Azarov stepped down following his election to Parliament. The government remains on a temporary basis.
“There’s a combination of news that suggests Ukraine is becoming more receptive to the idea it needs to go back to the IMF,” Ivan Tchakarov, chief Russia and Commonwealth of Independent States economist at Renaissance Capital in Moscow, said today by phone. “The downgrade will also make Ukraine’s life more difficult and makes an IMF program more likely.”
The yield on Ukraine’s government dollar-denominated bonds due 2022 rose to 7.726 percent as of 12:04 p.m. in Kiev from 7.541 percent yesterday, data compiled by Bloomberg showed. The hryvnia was little changed at 8.1835 per dollar, while the cost of insuring government debt for five years using credit-default swaps rose 14 basis points, or 0.14 percentage point, to 618.
Moody’s, whose downgrade left Ukraine’s rating on a par with Argentina, Jamaica and Belarus, retained its negative outlook, an indication further cuts are possible.
“The primary driver underlying Moody’s one-notch downgrade of Ukraine’s government bond ratings is the rating agency’s assessment of a deterioration in the country’s institutional strength, against the backdrop of poor policy predictability as well as reduced data transparency,” Moody’s analysts said yesterday in a statement.
Ukraine is rated B+ by Standard & Poor’s and B by Fitch Ratings, four and five levels short of investment grade, respectively.
“Ukraine is a deteriorating credit story,” Tim Ash, head of emerging-market research at Standard Bank Plc in London, said in an e-mailed note. “I would expect further ratings downgrades from the other agencies.”
Almost half the time, government bond yields fall when a rating action suggests they should climb, or they increase even as a change signals a decline, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as 38 years. The rates moved in the opposite direction 47 percent of the time for Moody’s and for Standard & Poor’s. The data measured yields after a month relative to U.S. Treasury debt, the global benchmark.
IMF representatives will now arrive in Kiev next month because “the Ukrainian authorities have indicated this will allow participation of the new Cabinet,” Max Alier, head of the lender’s office in Ukraine, said in an e-mailed statement.
The east European nation agreed on its most recent bailout in 2010 after its economy shrank 14.8 percent the previous year. The $15.4 billion facility has been frozen since March 2011 because the government refuses to trim heating subsidies.
The government will have to repay $5.7 billion to the IMF next year, according to the lender’s website, with an initial payment of $404 million due Jan. 30 and a further $2.4 billion scheduled by May 10. It raised $1.25 billion by selling Eurobonds Nov. 20 and had initially sought to prolong its current IMF deal, saying conditions imposed by the lender under a new program would probably be tougher.
A failure to agree on IMF financing may trigger another rating downgrade, Moody’s said.
HSBC Holdings Plc and Erste Bank Group AG predict Ukraine’s economy will contract in the second half because of lower prices for metals, the country’s biggest export earner. Gross domestic product may advance by 1 percent for the year as a whole, according to the government.
The 2013 budget, which envisages 3.4 percent economic growth and a deficit of 3.2 percent of GDP, was backed today by 242 of the Kiev-based Parliament’s 450 lawmakers.
While the government targeted a fiscal shortfall of 2.7 of GDP this year, the actual figure will be closer to 3.7 percent, according to Kiev-based Dragon Capital, which said the IMF may seek a narrower 2013 deficit than planned in the budget.
“While the government successfully tapped external markets in recent months, capitalizing on the global risk-on mood, its further debt-raising endeavors are increasingly dependent on the resumption of IMF funding, for which more fiscal consolidation effort may be required,” Dragon said yesterday in an e-mailed note to clients.