International finance industry analysts at the Fitch Rating agency have assigned a BB- rating to the upcoming five-year, USD 500 million Ukrainian government Eurobond issue. The rating is in line with Ukraine’s long-term foreign currency issuer default rating (IDR) of BB- (BB minus) with stable outlook.
Ukraine was expected to issue its dollar-denominated Eurobond at the end of June but is expected to delay the launch. The government held a roadshow in the United States and Britain from June 23 to June 26 as part of efforts to promote the coming issue. Ukrainian Finance Minister Viktor Pynzenyk said that the government might proceed with the long-planned Eurobond issue by August.
Waiting on inflationary factors
Last month, Ukraine chose BNP Paribas, JP Morgan and Standard Bank as lead managers for the issue. The government previously announced that it would issue Eurobonds as soon as the macroeconomic situation in the country stabilised, and in particular, when the inflation rate decreased significantly.
“We consider the news of Fitch’s rating to be positive, as it is the highest possible rating under the ceiling of the sovereign rating. The rating the issue has been given seems to be reasonable given the current state of the country and as such it will assist in the raising of foreign funds by the government. However, the issue of the new Eurobonds may accelerate inflation in the country. Therefore, we consider that the government should minimise its intake of foreign funds and concentrate on local borrowing via local government bonds and receipts from privatisation,” commented Viktoriya Bezverkha, a macroeconomic analyst with Millennium Capital in Kyiv.
A spring ratings wobble
Fitch revised the outlook for Ukraine’s IDRs down from Positive to Stable in May 2008, citing an unconvincing policy response from the authorities to mounting risks to the country’s macroeconomic and financial stability posed by rising inflation and deteriorating external finances. A statement released by Fitch analysts stated: “Amelioration of current risks involving a much firmer commitment by the authorities to restore the conditions for sustainable growth would be positive for the ratings. However, a further worsening of risks to the economy’s prospects would add to negative pressure on the ratings.”
In May 2008, Consumer Price Inflation reached 31%, one of the highest rates among Fitch-rated sovereigns, up from 17% at the end of 2007. A 49% rise in food prices is thought to be driving Ukraine’s soaring inflation, but overly loose monetary conditions have also played a part. Strong capital inflows fuelled a broad monetary growth of 51% in 2007, as the country’s National Bank bought foreign exchange to maintain the Ukrainian hryvnya’s peg to the USD. Fitch expects Ukraine’s current account deficit to swell to 7.5% of GDP in 2008, as domestic demand booms. On top of all this, Ukraine could face a doubled gas import price in 2009, potentially adding USD1.5 billion to the already soaring import bill. Fitch projects Ukraine’s external financing needs, including short-term debt, at 133% of official reserves in 2008, against a BB-rated country median of 77%.
Govern response fuelling investment community concerns
The response from a government dogged by ongoing political instability has been widely viewed as unconvincing by the international investment community. The National Bank revalued the UAH peg by just 4% in April, spurning IMF advice to move to a more flexible regime that could help absorb the terms-of-trade shocks to which Ukraine is exposed. Bank credit to the domestic private sector rose 78% in the year leading up to March 2008, a worryingly high pace given the weaknesses of the sector. Sensitivity to banking sector fragilities may be inhibiting the National Bank’s willingness to tighten domestic monetary conditions more aggressively.
On fiscal policy, the authorities’ latest 2008 budget projects a deficit of about 1%, only a 0.5% tightening from the original 2008 budget. Meanwhile, President Yushchenko has repeatedly vetoed privatisation plans to influence budgetary policy. This has produced a lack of economic policy clarity which poses the risk of high inflation becoming entrenched in Ukrainians’ expectations. Nominal wages grew 40% in May 2008 from the year before, risking a wage-price spiral, according to the analysts at Fitch.
The future remains bright However, Fitch believes that Ukraine’s longer-term prospects remain bright. The country joined the WTO in 2008, starting Ukraine on the road to a free-trade area agreement with the EU, a process that should exert sustained pressure on the government to improve the country’s structures and institutions, and underpinning the prospects for sustaining the pick-up in FDI receipts that began in 2005. Despite political noise, a fundamental consensus exists between the major parties and blocs on Ukraine’s path towards a market economy, while a genuine democracy has emerged since the 2004 Orange Revolution, Fitch analysts concluded.
