Standard & Poor’s Ratings Services has revised its outlook on Ukraine to negative from stable.


At the same time, it affirmed its B long-term and short-term sovereign credit and senior unsecured debt ratings on Ukraine.

“The negative outlook signals the possibility of a downgrade if the implementation of fiscal and structural reforms is further delayed,” says Standard & Poor’s credit analyst Helena Hessel. “Weak policy execution highlights the politically fragmented and indecisive nature of the parliament, as well as the fragile integrity of the government dominated by President Leonid Kuchma. The 2002 state financing strategy has been undermined by a significant shortfall in privatisation revenues (with receipts of US$80mn in the first eight months against a target of US$1bn for the whole year) and the government’s inability to draw on IMF and the World Bank funds,” she adds.

Various ad hoc legislative measures allowing additional borrowing on the domestic markets and cutting non-protected expenditures are now needed to ensure timely debt-service payments. The government also plans to issue debt on international capital markets. Debt service, as well as wage payments, are currently protected by a special budgetary code approved by parliament. Beyond 2002, however, debt service could be threatened unless the budgetary process is strengthened.

Sovereign external debt service due in 2003 is estimated at US$1.6bn, up from US$1.3bn in 2002. The potential payment crisis is purely a fiscal problem, given the strong international reserves held by the National Bank of Ukraine (more than US$4bn). The 2003 budget, as amended by parliament, has become unrealistic in the absence of legislation on tax reform and an acceleration of privatization. In addition to fiscal slippage, additional downward pressure could come from increased domestic political stalemate. Conversely, achieving IMF-agreed fiscal targets and negotiating a new program with the Fund would help to maintain the ratings on Ukraine at their current level.