Nov. 1 (Bloomberg) -- Ukraine’s debt rating was cut to the same junk level as Greece by Standard & Poor’s, which said the government is struggling to weather a shortage of foreign currency, increasing the likelihood of a hryvnia devaluation.
The rating company lowered Ukraine’s long-term sovereign credit rating one step to B-, six levels below investment grade, with a negative outlook, according to a statement released today. That leaves the eastern European nation on par with Greece and Belize, both of which have restructured debt in the past several years.
“The downgrade reflects our view that the government’s strategy is increasingly unlikely to secure sufficient foreign currency to meet its elevated external financing needs,” S&P analysts said. “Devaluation of the Ukrainian hryvnia has become more likely. The potential magnitude of this has also increased in light of the government’s defense of the exchange rate through the depletion of foreign-currency reserves.”
The move underscores the challenges facing Ukraine more than a month after it was downgraded deeper into junk status by Moody’s Investors Services amid growing political and economic risks and a lack of prospects for a bailout from the International Monetary Fund. Ukraine yesterday pledged to stem declines in its foreign reserves next year as the IMF said it wouldn’t ease conditions for a new loan.
With the government’s efforts falling short of stabilizing its precarious finances, Ukraine’s default risk has risen to the world’s fourth-highest after Argentina, Cyprus and Venezuela, according to data complied by Bloomberg. The benchmark Ukrainian Equities Index has lost more than 9 percent this year for the worst performance among bourses in eastern Europe.
“Markets will respond relatively quietly to the rating downgrade,” said Alexander Morozov, Moscow-based chief economist for Russia, the Commonwealth of Independent States and Baltic states at HSBC Holdings Plc. “S&P’s downgrade is negative news for Ukraine, but it should not be overplayed.”
The cost of credit-default swaps to protect Ukrainian bonds for five years against non-payment rose 2 basis points to 988 at 6:29 p.m. in Kiev after surging to 1,089 on Sept. 27, the highest since January 2010.
With bond yields exceeding 10 percent, Ukraine is looking for “other sources of financing,” Halyna Pakhachuk, head of the Finance Ministry’s department debt, said yesterday at a Fitch Ratings conference in the capital, Kiev.
Ukraine faces a “one-in-three” chance of another downgrade during the next year if its international reserves decline faster than S&P expects, the rating company said. The holdings, which shrank by 26 percent from a year earlier in September, may decline to below three months of current account payments and to less than 30 percent of external short-term debt in 2013, according to S&P.
The current-account deficit more than doubled to $5.05 billion in the third quarter from $2.25 billion in the previous three months, according to central bank data released today.
S&P analysts “assume” a managed devaluation of the Ukrainian currency against the U.S. dollar in 2014 to 9.5, from an estimated 8.2 in 2013. The hryvnia was 0.1 percent stronger at 8.1780 per dollar versus 8.1873 yesterday.
“The ratings are constrained by our view of political uncertainty, financial sector stress, and weak external liquidity,” S&P said. “Under our base case, we do not expect Ukraine to commit to broad-based reforms. This makes an agreement on a multi-lateral external financing program unlikely.”
Ukraine’s economy slipped into recession in the third quarter as industrial production plummeted amid weaker demand for exports such as steel. The government has been discussing a third IMF bailout since 2008 for more than a year, rejecting demands by the lender to cut household heating subsidies as President Viktor Yanukovych prepares for elections in 2015.
Ukraine’s gross domestic product fell 0.4 percent from the previous three months in the third quarter after shrinking 0.5 percent between April and June. Central bank reserves were at a seven-year low of $21.6 billion at the end of September, down from $29.3 billion a year earlier, as policy makers intervened to support the hryvnia and repay existing IMF loans.
An IMF mission left Kiev this week, with negotiations over a new $15 billion loan continuing. In a statement yesterday, the Washington-based lender urged “ambitious fiscal consolidation” and reiterated demands on energy tariffs and the hryvnia.
“The likelihood of a new full-scale IMF program remains essentially the same as it was before, if Russia does not escalate pressure on Ukraine,” Vladimir Osakovskiy and Vadim Khramov, economists at Bank of America, said in e-mailed comments. “The IMF will most likely insist on the same conditions, including fiscal consolidation and currency flexibly, which have been at the core of their long-lasting negotiations.”
Ukraine is seeking to sign an association agreement with the European Union this month, a move that’s angered Russia and triggered threats of trade blockages. Russia resumed tighter customs check at the border, causing delays to cargo trucks, Ukraine’s Tax and Revenue Ministry said yesterday.
“Uncertainty remains as to whether or not Ukraine will sign an association agreement with the EU,” S&P said. “Signing the agreement would be positive for Ukraine’s trade over the long term, but there could be short- to medium-term negative implications largely related to Russia’s reaction.”
To contact the reporter on this story: Kateryna Choursina in Kiev at email@example.com
To contact the editor responsible for this story: Balazs Penz at firstname.lastname@example.org