Ukraine Protests Increase Pressure on Credit Profile, says Fitch

The duration and scale of anti-government protests in Ukraine has put additional pressure on the country’s credit profile, Fitch Ratings says.

According to the credit ratings agency, the longer the standoff goes on, the greater the risk that political uncertainty will raise demand for foreign currency, cause inward investment to dry up, or trigger capital flight, causing additional reserve losses and increasing the risk of disorderly currency moves.

Developments over the weekend suggest the crisis is some way from resolution as the opposition hardens demands for a change of government. Between 150,000 and 200,000 protestors gathered in Kiev, according to press reports.

Even if the immediate crisis were defused and protests ended, political uncertainty would persist. The government would still be likely to find it hard to resolve the diplomatic challenge of building closer relations with the European Union (EU) while placating Russia.

The demonstrations resulted from the halting of preparations for an EU Association Agreement (AA) last month. EU commissioner for enlargement, Stefan Fule, said at the weekend that the EU and Ukraine were “further and further apart” in discussions on reviving the AA. Meanwhile, on 17 December Ukraine may sign a trade agreement with Russia that stops short of joining the Customs Union.

Other potential outcomes would be unlikely to reduce near-term political uncertainty, Fitch adds. If the government fell, there would be a hiatus while a new administration took shape. A violent crackdown may create splits within the government. Political fragmentation may be a risk as support for the government appears to be ebbing among some of Ukraine’s wealthiest businessmen, who wield considerable political influence.

President Yanukovych said last week he would seek to restart talks with the International Monetary Fund (IMF), which would be a credit positive. An IMF deal would ease refinancing risk ahead of heavy external debt repayments in 2014-2015 and help the economy recover (Ukraine gross domestic product (GDP) fell 1.3% year-on-year in the third quarter of 2013). But the authorities’ intent is uncertain and agreement looks unlikely without a politically difficult U-turn on household gas tariffs.

Russia may be willing to provide access to financing, but Fitch does not expect it to fully address external financing risks. Furthermore, Russian support could intensify the political crisis.

Ukraine’s B- rating incorporates a high degree of tolerance for political uncertainty. The key question remains how the crisis will affect Ukraine’s fragile external financial position, which is a key ratings weakness. National Bank reserves fell further in November, to US$18.79bn from US$20.6bn in October, and are now below 2.5 months of imports. Interest rates rose sharply as the National Bank sought to tighten hryvnia (UAH) liquidity.

A B- rating already indicates that material default risk is present, with a limited margin of safety. Fitch’s negative outlook reflects the risk of that margin being further eroded. Continued marked decline in international reserves, caused for example by an upsurge in capital flight, a sharp currency devaluation (which would damage public and private sector balance sheets encumbered by foreign-currency debt) or reduced confidence that Ukraine will be able to meet its external financing needs would be likely to trigger a downgrade, the CRA adds.


Related reading