Fitch Ratings-London-12 February 2009: Fitch Ratings has today downgraded Ukraine's Long-term foreign and local currency Issuer Default Ratings to 'B' from 'B+'. This reflects increased risk of a banking and currency crisis in Ukraine, due to intensified stress on the financial system and greater risks to successful implementation of Ukraine's IMF-supported programme. The Outlooks on both IDRs are Negative. The agency has also downgraded the Country Ceiling to 'B' from 'B+'. The Short-term foreign currency IDR is affirmed at 'B'.
"The political consensus needed for Ukraine to adhere to its IMF-backed programme is fragile, while the global and regional macroeconomic environment has deteriorated further since the previous downgrade in October 2008," says Andrew Colquhoun, Director in Fitch's Sovereigns Group.
Stress on Ukraine's heavily-dollarised financial system has intensified. Local-currency (UAH) deposits in the banking system fell 7.4% month-on-month in January 2009, while FX deposits fell 2.2%. The central bank (NBU) has taken six banks into administration. Fitch has downgraded the Individual ratings of six banks since October 2008. The NBU has announced that larger banks so far audited need an additional UAH22bn in capital, around 2% of projected 2009 GDP. More will be needed as smaller banks are audited, while a further deterioration in the economy or a sharp fall in the UAH could increase the requirement, and potentially the call on the sovereign to provide the resources.
The UAH remains under downwards pressure. The NBU has come under political pressure to stem the currency's depreciation,even at the cost of draining reserves, which fell to USD28.8bn by end-January 2009, 24% down from an end-August 2008 peak of USD38.1bn. A full banking and currency crisis would damage the real economy and the sovereign's financing options, directly impairing sovereign creditworthiness. The sovereign faces a USD0.5bn eurobond maturity in August 2009, and a possible additional CHF768m in September 2009 if holders choose to exercise put options. The sovereign's ability to service this debt remains supported by reserves of USD28.8bn, although Fitch is concerned that willingness to pay may be eroded by a full financial crisis.
The IMF has warned that risks remain high to successful implementation of Ukraine's programme, matching USD16.4bn of IMF finance to tough policy conditions including a freer exchange-rate float and a fiscal tightening towards balance.The degree of exchange rate management by the NBU, arguably,has gone against the spirit of the programme, while the 2009budget targets a deficit of 3% of GDP. On balance, Fitch still expects the next USD1.9bn tranche to be disbursed, possibly with a delay. However, Fitch is concerned that the programme is at risk from the difficulty of securing the necessary policy consensus in a challenging political environment. Even if the programme remains on track, the further deterioration in global economic prospects since October 2008 adds to the difficulties facing Ukraine. Fitch expects the economy to contract 4.5% in2009, making fiscal tightening more difficult to implement.
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