Ukraine Rating Cut by Fitch as East Conflict Hurts Growth

Ukraine’s credit rating was cut by Fitch Ratings, which cited a worsening economic outlook as the military conflict with pro-Russian separatists in the nation’s east curbs business activity.

The company lowered its assessment to CCC from B-, which signals a high risk of default. Only Argentina, which failed to make an interest payment last month, is rated lower than Ukraine among 104 countries Fitch tracks.

While the government has recaptured territory from the rebels, conflict may persist or intensify, delaying economic revival and damaging productive assets, Fitch wrote in a statement yesterday. Ukraine and its allies say the war is being fueled by Russian support for the insurgents, which President Vladimir Putin has denied.

“It’s an indication that the quality of debt has deteriorated,” Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Managementin Birmingham, Alabama, said by phone yesterday. “It’s not a predictor, it rather reflects the current situation in the country as the economy declines and the currency devaluates.”

Ukraine’s economy has been rocked by Russia’s annexation of Crimea and pro-Russian separatist attacks in the nation’s eastern industrial heartland. The government sealed a $17 billion loan from the International Monetary Fund to stave off bankruptcy and received the first tranche in May. The hryvnia has lost 39 percent against the dollar this year, data compiled by Bloomberg show.

Shrinking Economy

The eastern European nation’s government predicts the economy will shrink 6 percent this year. It needs more financing than the IMF program envisages and will hold a donor conference in September, Finance Minister Oleksandr Shlapak said this week.

Ukraine’s bonds and currency accelerated their declines this month as the military conflict persists.

The yield on the $2.6 billion of bonds due 2017 rose 37 basis points to 10.4 percent yesterday, up from a six-month low of 8.06 percent set in July. It reached a record 16 percent in February. The hryvnia lost 3.1 percent this week, extending its drop in August to 9.4 percent, the most among the 171 currencies Bloomberg tracks.

IMF Money

Receipt of the second tranche of financial aid from the IMF will help stabilize the hryvnia, Prime Minister Arseniy Yatsenyuk said on Aug. 19. The Washington-based lender has said Ukraine qualifies for the $1.4 billion disbursement, which may be approved by Aug. 29, according to Yatsenyuk.

Investors often disregard ratings companies’ credit grade and outlook changes. France’s 10-year yield, which was 3.08 percent when S&P removed its top rating in January 2012, tumbled to a record-low 1.339 percent on Aug. 15 this year.

Fitch’s decision follows Standard & Poor’s, which cut Ukraine to CCC, eight levels below an investment rating, from CCC+ in February amid deadly street protests that unseated President Viktor Yanukovych. Moody’s Investors Service lowered the country’s rating one level to Caa3, two steps above default, in April.

“It will make debt refinancing more expensive,” Arjun Jayaraman, a money manager at Causeway Capital Management LLC in Los Angeles, said by e-mail yesterday. “These actions don’t sound good for Ukraine.”

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