Fitch downgrades Ukraine's long-term ratings to 'C' from 'CC'

MOSCOW. July 25 (Interfax) - Fitch Ratings has downgraded Ukraine's Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) to 'C' from 'CC'.

The agency does not assign outlooks to sovereigns with a rating of this category.

The long-term local currency IDR was affirmed at 'CCC-', short-term IDR at 'C' and country rating ceiling at the level of 'B-', Ukrainian media reported, quoting a Fitch press release.

"The downgrade of Ukraine's LTFC IDR reflects Fitch's view that the agreement in principle reached on 22 July between the government and some Eurobond holders on restructuring terms, marks the start of a default-like process," Fitch said.

In Fitch's view, the reported agreement with external commercial creditors constitutes a distressed debt exchange under its sovereign rating criteria, as it involves "a material reduction in terms, including reductions in principal amount and interest, and extension of maturities."

Fitch expects that the sovereign will not service its external commercial debt, including the 2026 Eurobond coupon due on August 1, until a restructuring agreement with bondholders is completed.

Fitch forecasts that the general government deficit will remain high at 17.1% of GDP in 2024, and considered that significant fiscal consolidation will be constrained by the continuation of the conflict (defense spending was 31.3% of GDP in 2023), maintaining elevated reliance on foreign financing. Fitch also projects that debt will increase to 92.5% of GDP in 2024, well above the projected 70.3% median for 'B'/'C'/'D' rated sovereigns.

The agency said Ukraine's international reserves stood at $37.8 billion in June, but have declined over the past three months due to increased FX sales. "Greater exchange rate flexibility, a credible policy mix and continued official support in line with the IMF program reduce risks to macroeconomic and financial stability in the near term," it said.