18 Aug 2022 10:47

Fitch upgrades Ukraine's long-term rating to "CC" after completion of deal to defer debt

MOSCOW. Aug 18 (Interfax) - Fitch Ratings has upgraded Ukraine's long-term foreign currency (LTFC) issuer default rating (IDR) to "CC" from "RD" (restricted default), the agency said in a press release.

The rating upgrade "follows the execution of consent solicitation on 11 August to restructure external debt, which we deem constitutes completion of a distressed debt exchange (DDE), curing the 'restricted default,'" Ukrainian media reported early Thursday, citing Fitch.

Payment of about $6 billion in principal and interest on Ukrainian Eurobonds has been deferred by 24 months, easing pressure on foreign debt servicing amid weakening international reserves and acute spending needs, the agency said.

However, the "CC" rating "reflects unresolved debt sustainability risks," as well as the country's "highly stressed public and external finances and macro-financial position," Fitch said.

The agency expects the crisis to continue into 2023, which will push the state debt over 100% of GDP and increase inflationary and external pressures, while sources for financing the deficit remain unclear.

"A broader restructuring of the government's commercial debt is therefore probable in our view, although the timing is uncertain," Fitch said, adding that this might happen in 2024.

The agency also said it believes that the prospects of a political resolution to the crisis through negotiations are low, in part because the Ukrainian government is unlikely to agree to give up any significant territory.

Fitch said it expects Ukraine's economy to contract by 33% in 2022 and see a modest recovery of 4% in 2023, while inflation will accelerate from 22.2% in July to 30.0% at the end of 2022 and remain high in 2023, averaging 20.0%.

The agency also said it expects Ukraine's current account to return to a deficit in 2023, amounting to 1.7% of GDP, which will put additional pressure on international reserves.

Fitch forecast that the general government deficit will grow to 28.6% of GDP in 2022 and remain high at 21.9% of GDP in 2023.

Fitch also affirmed Ukraine's local currency IDRs of "CCC-", to which they were downgraded on July 22. There has not been any significant change in the risk of default on Ukraine's local currency debt since then, the agency said.

"The lower default risk than on foreign-currency debt partly reflects the greater disincentive for the government to restructure local-currency debt, given 47% is held by NBU, a further 40% by banks, and just 6% by non-residents, and the absence of strong international pressure to bring domestic debt into a restructuring process," Fitch said.