13 Feb 2023 17:00

Moody's downgrades Ukraine's ratings to Ca

MOSCOW. Feb 13 (Interfax) - Moody's Investors Service has downgraded Ukraine's foreign- and domestic-currency long-term issuer ratings and foreign-currency senior unsecured debt ratings to Ca from Caa3 and changed the outlook to stable from negative, Ukrainian media reported, quoting a Moody's press release issued on Friday.

The downgrade is driven by the consequences of the ongoing crisis that are likely to pose long-lasting challenges to Ukraine's economy and public finances, Moody's said.

These challenges increase risks to government debt sustainability, making a debt restructuring with significant losses for private-sector creditors very likely, it said.

The stable outlook reflects balanced risks at the Ca rating level.

Moody's said an end to the crisis and significant resumption of economic activity over the near term might result in lower losses for private investors in the event of a restructuring, otherwise losses for private sector investors could be larger than implied by a Ca rating.

Ukraine's local- and foreign-currency ceilings have been lowered to Caa3 from Caa2. The one-notch gap between the local-currency ceiling and the sovereign rating reflects considerable policy uncertainty and unpredictability amid very high geopolitical risks, and the presence of large pressures on the external position, the agency said.

Moody's expects in its baseline scenario that the crisis will be protracted, and the economy will register a small contraction of real GDP by 2% in 2023, followed by a mild recovery in 2024. Despite the high degree of uncertainty, in its baseline scenario, Moody's expects that macroeconomic and financial stability will be maintained.

Successful implementation of the IMF Program Monitoring with Board Involvement can pave the way for a funded program already this year that can further anchor policymaking and improve governance. The latter will be key to finance post-crisis reconstruction, Moody's said.

In Moody's view, while prospects of EU accession remain very distant, the accession process will drive institutional reforms and anticorruption efforts.

Moody's expects Ukraine's budget will remain under significant pressure in 2023 due to large defense and social spending, although Moody's expects the deficit to decline to around 8% of GDP including grants, from 17% last year, mainly reflecting expenditure cuts amid constrained funding availability.

The current account posted a surplus of 5.7% of GDP in 2022. Moody's expects the current account balance to move into a small deficit in 2023, mainly driven by a widening trade deficit reflecting reduced export capacity and sustained imports, in particular of food, fuel, and materials for repairs.

Ukraine's government debt burden is rapidly rising with risks to the debt trajectory tilted to the upside. Moody's estimates that debt-to-GDP increased by almost 35 percentage points to 82% of GDP at end-2022 and projects it will exceed 90% of GDP at the end of 2023.

The materialization of contingent liabilities from state-owned enterprises, particularly from the energy and financial sectors, although difficult to quantify, poses an additional fiscal risk, Moody's said

As a result, Moody's expects that the public debt dynamics will prove unsustainable, increasing the likelihood of a broader debt restructuring resulting in significant losses being imposed on commercial creditors.

"While there is significant uncertainty around its timing and form, a debt restructuring has become highly likely in light of the sustained economic disruption and the large fiscal costs," Moody's said.