Dec. 26 (Bloomberg) -- Ukraine had its credit-rating outlook upgraded to stable from negative by Standard & Poor’s after Russia said this month that it would provide $15 billion of aid and cheaper natural gas.
S&P reaffirmed Ukraine’s long-term sovereign rating at B-, six steps below investment grade, and said it no longer predicts a depreciation of the hryvnia, according to an e-mailed statement today. The ratings service said it might still downgrade the country in the next 12 months if Russia’s support comes into doubt or political turmoil worsens.
“Ukrainian external and fiscal funding challenges have been significantly reduced by the announcement of a financial support package from Russia,” Trevor Cullinan and Ana Jelenkovic, credit analysts for S&P, said in the report.
Russian President Vladimir Putin agreed to buy $15 billion in Eurobonds and cut the price it charges for gas by 30 percent after Ukraine decided to postpone an association agreement with the European Union. Ukraine, which had its rating cut to Greece’s level at S&P last month, needed the bailout after its economy entered a third recession since 2008 and foreign currency reserves fell to seven-year low.
Yields on Ukrainian debt tumbled after the Dec. 17 bailout deal with Russia. The government is paying a 5 percent yield on the $3 billion in two-year Eurobonds bought by Russia. The yield on Ukraine’s dollar-denominated Eurobonds due in June 2016 has tumbled 240 basis points, or 2.4 percentage points, to 9.17 percent since the day before the agreement, according to data compiled by Bloomberg.
While the Russia financing should cover Ukraine’s needs for the next year, it also deepens the country’s dependence on maintaining good ties with its larger neighbor, S&P said in the report. Russia will review the aid agreement quarterly.
“Ukraine’s financial dependence on Russia will increase if market conditions do not afford the government the opportunity to issue debt to international capital market participants other than Russia, or if other sources of financing are not found,” Cullinan and Jelenkovic wrote. It remains “unclear” what Russia will require in return.
The decision to halt talks with the EU sparked the largest street protests since 2004 in the capital Kiev and other cities, with activists demanding the departure of President Viktor Yanukovych and his cabinet.
Jailed former Prime Minister Yulia Tymoshenko, a leader of 2004 protests that toppled Yanukovych, called on supporters yesterday to protest at the president’s residence outside Kiev. Protests gained momentum yesterday after an attack on journalist Tetyana Chornovil prompted renewed calls for the ouster of Interior Minister Vitaliy Zakharchenko.
Ukraine expects to get the remaining $12 billion from Russia early next year, Prime Minister Mykola Azarov said at a government meeting in Kiev yesterday. He called the loan “a turning point” in stabilizing Ukraine’s finances and economy.
Russia is considering financial instruments in addition to bond purchases to support Ukraine’s budget, Russian Finance Minister Anton Siluanov said in an interview on state television channel Rossiya 24. Russian banks are also in talks with Ukrainian companies about transportation and other project funding, he said.
Gross domestic product contracted 1.3 percent in the third quarter, the same decline as in the previous three months, according to official estimates. Output will be unchanged this year from 2012, Azarov said yesterday. GDP grew 0.2 percent in 2012.
S&P said it expects “little progress” in efforts to reduce the budget deficit, set domestic gas prices closer to market levels or make the hryvnia exchange rate more flexible.
Changes to cut external financing needs or reduce Ukraine’s spending on interest payments to less than 5 percent of revenue could prompt S&P to consider a ratings upgrade, according to the report.