22 Sep 2009 17:42

Moody's: Ukraine's political clash complicates economic policy decisions

NEW YORK. Sept 22 (Interfax) - Presidential politicking ahead of the January 2010 election is behind the policy confusion that has reigned at Ukraine's central bank (NBU) for more than a year, Moody's said in a new Issuer Comment entitled "Ukraine's Political Clash Complicates Economic Policy Decisions."

More broadly, says the agency, policy disarray across the macroeconomic spectrum threatens a new standoff with the IMF and another break in confidence that could renew downward pressure on Ukraine's B2 sovereign ratings.

"The context of recent conflicts over central bank policy has been further complicated by the global recession and its severe impact on the Ukrainian economy and currency," says Jonathan Schiffer, Moody's VP-Senior Credit Officer and lead analyst on Ukraine. "Ideological battles between the President and Prime Minister, rivals in the upcoming presidential election, have contributed to a confusing array of policy measures as well as important personnel changes at the NBU during the past year."

Schiffer points out that these controversies have led to frequent clashes with the IMF over the failure to meet the detailed criteria set out in the country's stand-by program, leading to cliff-hanging IMF decisions regarding the extension of program tranches. Repeated standoffs have further aggravating market skepticism about the ability of highly indebted companies and banks to avoid default.

"With the policy quagmire growing and political turbulence rising, the populace has exhibited weakened confidence in the hryvnia currency, much as they did before the last presidential elections in autumn 2004," says Schiffer.

To offset such skepticism and prevent another steep fall in the exchange rate, the NBU has responded with a battery of administrative measures. In Moody's view, these have only served to further confuse financial transactions, confidence in the local currency and banking system, and the chances that banks will start issuing credit again to stimulate the real economy.

Schiffer says that another round of speculation regarding the currency -- such as would be caused if the IMF postpones the next program disbursement -- could lead to a considerable drain in reserves. Such developments would lead to rising debt ratios alongside Ukraine's weak institutional environment and likely spur Moody's to consider whether to act on the negative outlook currently in place on the B2 government ratings. The situation merits careful monitoring.