S&P downgrades Ukraine’s rating

The negative outlook on the long-term foreign currency rating reflects risks for servicing Ukraine’s commercial debt, given the government’s plan to restructure it, the agency said.

International rating agency S&P Global Ratings downgraded Ukraine’s long-term sovereign foreign currency credit ratings from “CCC+” to “CCC”. The outlook for the rating is “negative,” the agency said in a statement released earlier in the day.

The rating action follows Ukraine’s official announcement that it is restructuring its external foreign-currency debt to restore public debt sustainability, as part of a recently agreed four-year $15.6 billion extended line agreement of credit to the IMF agency.

It was noted that the negative outlook on the long-term foreign currency rating reflects risks for servicing Ukraine’s commercial debt, given the government’s plan to restructure it.

At the same time, the agency affirmed the national currency ratings of Ukraine at ‘CCC+/C’ and ‘uaBB’ on a national scale.

“We understand that Ukraine’s national debt, denominated in the hryvnia, is not included in the debt restructuring plan,” S&P said.

The outlook for the national currency rating is stable.

The next scheduled publication of Ukraine’s sovereign rating is September 8, 2023.

The agency said it could downgrade further in the next 12 months if it believes it is almost certain that commercial debt will be included in the government’s debt restructuring.

We understand that the parameters and timing of the restructuring are yet to be determined and depend on the IMF’s public debt sustainability assessment, which is expected to be updated in early 2024.

S&P recalled that Ukraine’s official creditors, including the US, UK, Canada, France, Germany and Japan, agreed to extend the deferral of external debt payments until the end of the IMF program in 2027 from the previously agreed period from August 2022 to September 2024- go.

The group also agreed to further debt restructuring expected in mid-2024, but the deal is contingent on private external creditors pursuing debt restructuring at least favorably, the agency said.

“However, the potential restructuring will take place in more than a year, and the development of the war in Ukraine remains uncertain. To this end, the ability to see the exact scenario for commercial creditors will only increase in next year,” the release said.

S&P noted that bilateral debt accounts for only 5% of total government debt, while Ukraine’s commercial external debt accounts for about 20% of total government debt, and domestic government bonds are not included in the restructuring plans (both in hryvnia and in foreign currency. ) and debt to international financial institutions – respectively 40% and 35%.

“If a commercial debt restructuring were to occur in 2024, given the lingering balance of payments and fiscal problems, we would likely view it as problematic,” S&P added.

At the same time, it rated the government’s ability and medium-term incentives to meet its financial obligations in the Hryvnia slightly higher than in foreign currencies. The hryvnia-denominated debt is mostly owned by domestic banks, half of which is owned by the state, the agency said.

The report also says that Ukraine’s medium-term macroeconomic prospects are largely dependent on the duration and progress of the war. The main assumption is that there is no cessation of hostilities in the near future.

The other day, the World Bank worsened its forecast for Ukraine’s GDP. According to analysts, the Ukrainian economy will grow by only 0.5% this year, and by 3.5% in 2024.

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