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Standard & Poor’s Ratings Services has raised its long-term foreign currency sovereign credit rating on Ukraine to ‘BB-‘ from ‘B+’. At the same time, the long-term local currency rating was raised to ‘BB’ from ‘B+’. In addition, the ‘B’ short-term foreign and local currency ratings and ‘uaAA’ national scale rating were affirmed. The outlook is stable.

“Ukraine’s improved creditworthiness reflects an enhanced political and policy environment,” says Standard & Poor’s credit analyst Helena Hessel.


“The new president, Viktor Yushchenko, advocates transparency, the rule of law, and democratic values, which should over time lead to the implementation of political, institutional, and structural reforms that are necessary to transform Ukraine into a country with an open, democratic political system and a market-based economy.”

Although the shift toward greater transparency and institutional reform after years of pervasive corruption will not be easy, the current reformist administration’s political will is strong–even if its actual decisions are somewhat constrained by the upcoming parliamentary elections in March 2006.

The improvements in Ukraine’s external liquidity and government debt levels in 2003-04 also support the upgrade, by providing the government with necessary flexibility during the period of stress as it attempts to implement difficult reform. The current administration inherited an overheated economy with rising inflationary pressures and a growing fiscal deficit. Consumer price inflation increased to an average of 9% in 2004, up from 5.2% one year earlier. Standard & Poor’s expects 2005 inflation to increase to an average of 13%.

The general government deficit is estimated to have increased to almost 4.5% of GDP in 2004 due to pre-election fiscal relaxation, up from 0.7% in 2003. The government envisages a deficit of 1.5% of GDP in 2005. In Standard & Poor’s opinion, however, this target is very ambitious, and is unlikely to be achieved.

Although better tax collection and a crackdown on contraband has helped increase revenues in the first quarter of 2005 – a trend that is likely to continue through the year, albeit not at the pace projected by the government – spending pressures are enormous.

The two-notch upgrade of the long-term local currency rating on Ukraine is underpinned by expected systemic improvement in the country’s tax system, in particular through the elimination of tax privileges and exemptions. As a result, the government’s ability to collect taxes is likely to improve in coming years, reducing the default risk on hryvnia-denominated debt.

The stable outlook balances the new administration’s commitment to advance meaningful political and economic reform with an uphill struggle to fight corruption and break apart the old political-business nexus remaining from former president Leonid Kuchma’s administration.

“We expect a gradual rehabilitation of state institutions after decades of corruption and mismanagement, thereby increasing private sector confidence, reducing tax evasion, and attracting foreign direct investment into the economy,” says Hessel. “In the near future, reducing inflation, sustaining output growth, and achieving a fiscal adjustment are the key economic challenges that must be addressed to ensure that the improvement in Ukraine’s creditworthiness will not be jeopardised,” she concluded.

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