S&P revises Ukraine outlook to stable from positive
MOSCOW. Oct 30 (Interfax) - Standard & Poor's Ratings Services has revised its outlook on Ukraine to stable from positive, the agency said in a press release.
It has affirmed the 'CCC+/C' long- and short-term foreign currency sovereign credit ratings, the 'B-/C' long- and short-term local currency ratings, and the 'uaBBB' Ukraine national scale ratings.
"The outlook revision reflects renewed uncertainty regarding the implementation of the country's IMF Stand-by Arrangement ahead of the Jan. 17, 2010, presidential elections," Standard & Poor's credit analyst Frank Gill said.
Recent politically driven proposals to increase social expenditures imply a consolidated public sector deficit (including transfers to Naftogaz) in excess of 10% of GDP for 2009, which also reflects below-budgeted revenue collection.
There is also uncertainty whether or not the minimum wage will actually be increased, due to disagreement among various branches of government and competing political forces on the affordability of wage policies (and the rise in the pension deficit which such policies imply).
Until this issue is resolved, the next scheduled IMF loan disbursement for $3.9 billion is likely to be delayed, which would push Ukraine's financial account back into deficit. This in turn would have negative ramifications for investor confidence in the banking system, and for exchange rate stability.
Banking asset quality in Ukraine continues to deteriorate, which increases contingent liabilities of the government and has negative implications for economic growth. Moreover, in the absence of IMF funding, sources of budgetary funding are likely to be limited, which raises the risk that the deficit is monetized.
The stable outlook reflects the balance of risks on the sovereign ratings. Weak institutions and relatively short political cycles in Ukraine jeopardize the implementation of what S&P believes are critical budgetary and structural reforms, and the long-term solvency of the state.
"If Ukraine was to follow through on the implementation of the remainder of the IMF program, this could lay the foundations for more sustainable growth and an improved long-term budgetary performance, thereby leading to improvement in the sovereign ratings," Gill said. "On the other hand, further back-tracking on the program and the implementation of heterodox policy measures could destabilize the economy and also reduce confidence in the financial system, in turn leading to capital outflows, with negative implications for the sovereign ratings."