S&P downgrades Ukraine's rating to "CC" with a negative outlook due to expected debt restructuring

MOSCOW. March 11 (Interfax) - The S&P Global Ratings international rating agency has downgraded the long-term sovereign foreign currency credit rating of Ukraine from "CCC" to "CC," with a negative outlook, Ukrainian media reported, citing the S&P report.

"We expect the Ukrainian government to begin formal discussions on debt restructuring with its private creditors in the short term and complete the process by the middle of this year. We consider it a virtual certainty that Ukraine will default on its external commercial obligations," the report said.

Meanwhile, S&P confirmed Ukraine's short-term foreign currency rating of "C", as well as long- and short-term national currency credit ratings of "CCC+/C" and the "uaBB" national scale rating. The forecast for the long-term rating in the national currency is "stable."

"We understand Ukraine's hryvnia-denominated government debt is not in scope for the debt restructuring plan," the agency said.

It would likely downgrade the country to "SD" (selective default) during the restructuring, as it would view the debt as problematic due to its balance of payments situation and budget problems, S&P said.

A group of Ukraine's creditors has already extended deferment of payments on official bilateral debt until the end of the IMF program in 2027, but their participation in additional debt restructuring is possible subject to the consent of private external creditors to an equally favorable debt restructuring, S&P said. To this end, the government plans to achieve debt relief on Eurobonds before the existing moratorium on their payments expires in August this year.

Details of the restructuring will be disclosed in the coming months following the publication of the country's debt sustainability assessment (DSA) based on the approval of the third EFF program review. In the absence of restructuring, the Ukrainian government faces debt service payments on Eurobonds of $4.5 billion in 2024 and about $3 billion on average annually from 2025 through 2027, it said.

S&P said that a restructuring of hryvnia debt is unlikely, since it is mainly owned by the National Bank of Ukraine (NBU) and local banks, half of which are state-owned.

The Ukrainian government's financial position has been significantly undermined due to the negative impact on the economy of the military operation on the country's territory, combined with increased defense and security spending, the agency said.

In a situation where security risks and associated military spending are reduced, the overall budget deficit could decrease to an average of 6-7% of GDP in 2025-2027, S&P said. This deficit would be driven by only a partial economic recovery, high reconstruction costs and the need to support some state-owned enterprises, including in the energy sector.

The agency's base case scenario expects that foreign grants and concessional loans will continue to cover the majority of the Ukrainian government's funding needs this year and likely beyond. Ukraine will be able to attract $38 billion this year after $43 billion last year to finance the budget, despite the delay in the allocation of $8 billion from the United States.

If there is a shortfall with regard to US funding, the consequences might be manageable, since it could be covered by other donors and domestic borrowing, among other sources. However, there is a risk that external support for Ukraine may decrease after 2024 due to busy election schedules in key donor countries and the possibility that some governments may consider the costs associated with further support for Ukraine too high, S&P said.

S&P said that based on its macroeconomic and fiscal projections it forecasts that net government debt as a share of GDP will almost double compared with the level prior to the military operation to about 93% of GDP by end-2027. Additionally, the agency expects that the share of long-term concessional loans from multilateral and official creditors in total government debt will continue to increase from its current high level of 51%, the agency said.

It also projects that Ukraine's current account balance will remain in significant deficit, averaging around 7-8% of GDP over the forecast horizon through 2027. This is largely due to the worsening trade balance due to the slow recovery of exports and high imports caused by reconstruction.

An influx of foreign donor funds will most likely meet Ukraine's external financing needs over the next few years, and this will maintain the country's international reserves at their current high level, S&P said.