Fitch affirms Ukraine's Restricted Default rating, downgrades 2025 GDP outlook to 2.5%

MOSCOW. May 26 (Interfax) - The Fitch Ratings international rating agency has affirmed Ukraine's Long-Term Foreign-Currency Issuer Default Rating (IDR) at Restricted Default, Ukrainian media said, citing the agency website.

"Fitch considers that Ukraine is still going through a broader restructuring, with its GDP warrants to become non-performing only after the 31 May payment date. The sovereign's Long-Term Foreign-Currency IDR will remain in Restricted Default until Ukraine has normalized its relations with a significant majority of external commercial creditors," the agency said.

Following last year's restructuring of outstanding sovereign Eurobonds and state-guaranteed Ukravtodor debt, Ukrenergo reached a preliminary agreement on the restructuring of its $825 million state-guaranteed Eurobonds (with payments suspended since November 9, 2024), to be completed by July, it said.

At the same time, Ukraine and holders of its GDP warrants ($2.6 billion) have failed to reach an agreement on a restructuring. An external commercial loan (Cargill $0.7 billion, payments suspended from September 3, 2024) is also still to be restructured, the agency said.

The agency also affirmed CCC+ Local-Currency IDRs, thus reflecting Ukraine's continued service of local-currency debt. Only a small portion (1.1% as of May 2025) of Local Currency debt is held by non-residents, with the majority held by National Bank of Ukraine and domestic (mostly state-owned) banks. This ownership structure limits the benefit to Ukraine of a local-currency debt restructuring by creating potential fiscal costs (including bank recapitalization), it said.

A minerals deal between the U.S. and Ukraine has smoothed diplomatic tensions, but the potential economic benefits, as well as the degree to which it could potentially tie US economic interests with Ukraine's strategic security objectives, remain highly uncertain, the agency said.

As to the fiscal deficit, Fitch said it decreased to 17.2% GDP in 2024 owing to strong revenue performance, despite the economic slowdown and said it expected the deficit to grow to 19.3% of GDP in 2025.

According to the agency, Ukraine's funding needs for this year will be comfortably met while leaving additional liquidity buffers for the next. Net foreign financing is expected to reach $55 billion, relative to an average of $25 billion a year in 2022-2024. Funding uncertainties are high for 2026 and beyond. Fitch anticipates that domestic borrowings will increase in 2026, supported by a relatively resilient banking sector and lower domestic financing this year.

The agency expects the current account deficit to grow to 14.5% of GDP this year, from 7.2% of GDP in 2024 and 5.3% in 2023, reflecting higher gas and steel imports, lower remittances from Ukrainian refugees, and higher defense imports and goods exports at 38% below pre-crisis levels.

Inflation is forecast to average 12.3% in 2025, before easing to 6.5% in 2026, as base effects materialize and monetary policy transmission gains traction, Fitch said.

Fitch downgraded Ukraine's GDP growth forecast from 2.9% to 2.5% this year, in particular, due to constant tensions on the labor market.