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Standard & Poor’s Ratings Services has affirmed its ‘B’ long-term sovereign credit and senior unsecured debt ratings and ‘B’ short-term sovereign credit rating on

  • Ukraine. The outlook is negative.


“The maintenance of the negative outlook on Ukraine reflects continued financing uncertainties despite some recent positive signals,” says Standard & Poor’s credit analyst Helena Hessel. “The country’s continued financing constraints are purely a fiscal problem, given the strong international reserves (more than US$4bn) held by the National Bank of Ukraine.”

Following Standard & Poor’s revision of its outlook on Ukraine to negative from stable on November 12, 2002, the government successfully launched a US$260mn eurobond issue in December. Combined with various ad hoc legislative measures allowing additional borrowing on the domestic markets, cutting non-protected expenditures, and accumulating some payment arrears, this enabled the government to ensure full service of its domestic and external debt in 2002, as expected by Standard & Poor’s.

Sovereign domestic and external debt service due in 2003 is estimated to increase to US$2.2bn (including a further Eurobond repayment due in September), of which US$600mn will be interest payments. The increase includes a rise in external debt-servicing payments, to US$1.6bn this year from US$1.3bn in 2002.

The 2003 budget, which was recently adopted by parliament, is more realistic than the initial government draft as amended by legislators. In particular, budgetary revenues were adjusted to Hv50bn (about US$9bn), down from an earlier Hv54bn. Projected privatisation revenues, which are intended to finance the targeted budget deficit (0.8% of GDP) as well as debt servicing, have also been reduced significantly, to Hv2.1bn.

“However, even the new privatisation target might be too high,” says Hessel. “Actual privatisation receipts were only US$131mn in 2002, compared with a planned US$1bn, and the pace of privatisation so far this year has already fallen short of projections. As a result of the turbulent domestic political environment, the politically challenging and controversial privatisation programme is unlikely to accelerate.”

Weak policy execution highlights the politically fragmented and indecisive nature of the parliament, and still fragile integrity of the government dominated by President Leonid Kuchma. The new government of Viktor Yanukovich, appointed in early December, has had some legislative successes, but its support base in parliament remains extremely weak. As a result, progress on some politically challenging issues remains stalled such as a new tax code that would overhaul tax exemptions to politically connected companies, the repayment of VAT arrears to exporters, and accelerated privatisation. Reflecting these legislative failures, a new programme with the IMF has yet to be agreed on. In turn, the lack of an IMF agreement has delayed disbursement of World Bank loans.

Looking ahead, Hessel adds: “In the absence of funds from the IMF and the World Bank, Ukraine is left with a significant financing gap. The government still plans to issue up to US$600mn this year. However, uncertainties remain, and securing and implementing a new IMF programme would help to maintain the ratings on Ukraine at their current level.”