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Ukraine credit rating may be raised by Moody's, S&P on growth

Ukraine's credit ratings may be lifted this year by international credit agencies including Moody's Investors Service and Standard & Poor's as high prices for steel and grain drive economic growth.

Ukraine is the biggest former Soviet state with credit ratings below investment grade, a legacy of political instability and delays in selling state assets and gaining membership of the WTO. „Ukraine's rating is B1, which is very low,” said Jonathan Schisser, a Moody's analyst in London by telephone. „We may raise it” though the timing „depends on political stability and the government's ability to carry out structural reforms.” Ukraine, a country of 47 million bordering the EU and Russia, seeks higher credit ratings to reduce borrowing costs and win more overseas investment. Foreign direct investment since the collapse of communism in 1991 totals $20 billion, less than a fifth of the amount lured by neighboring Poland. Higher credit ratings mean lower debt costs for the government and Ukrainian companies. Ukraine's 7.65% benchmark government bond maturing in 2013 yesterday yielded 6.09%, down from 6.66% in October 2006. President Viktor Yushchenko is battling with Prime Minister Viktor Yanukovych, the man he ousted two years ago in the Orange Revolution, over domestic and foreign policies. Yushchenko seeks to bring the country into the European Union and NATO. Yanukovych, who aims to rekindle links with Russia, has taken control over some presidential powers, a move Yushchenko is challenging through the courts.

„The situation there is not fantastically improving, but it is stabilizing,” Standard & Poor's analyst Helena Hessel said in a telephone interview in New York. „The main constraint” on a ratings upgrade „is the political situation, as the president is losing power and the prime minister is opposing him.” Still, economic growth averaged 8.4% in the past five years and GDP has more than tripled from $30 billion in 1998, when the nation defaulted on hundreds of millions of dollars in debt, devalued its currency and eroded reserves. „We expect the rating agencies to respond to the improved credit fundamentals by delivering rating upgrades this year,” Tim Ash, the managing director at Bear Stearns International Ltd., said in e-mailed comment on February 7.  „Ukraine's rating at four to five notches behind Russia appears somewhat unjust.” Russia is rated Baa2 by Moody's, BBB+ by S&P, BBB+ by Fitch. Poland, which joined the EU in 2004, is rated A2 by Moody's, A- by S&P, A- by Fitch.

Exports including steel and grain and proceeds from shipping Russian gas via Ukrainian pipelines to Europe make up more than half of GDP. The economy is forecast to expand 6% a year through 2011, said Economy Minister Oleksandr Makukha on January 30. Ukrainian steel was traded at $455 per ton on the spot market February 5, compared with $312 per ton a year ago, according to Bloomberg data. Average prices for Ukrainian steel will increase 5% to 7% this year from a year ago, analysts say, including Ivan Kharchuk, an analyst at Kiev-based largest brokerage Dragon Capital. Average prices for Ukrainian grain were $153 per ton in January this year, compared with $85 per ton a year ago, Bloomberg data shows. „We believe there is a good prospect of an upgrade,” said Ed Parker, a senior director at Fitch sovereign group in London, in an e-mailed statement. „Athough Ukraine is likely to be subject to political noise for the foreseeable future, Fitch believes that political risk is of a lower order of magnitude than two-three years ago.”

Moody's raised Ukraine's outlook to positive from stable in November, indicating it is ready to improve the rating. The foreign and local issuer default rating was affirmed at B1, four steps below investment grade. Fitch raised Ukraine's outlook to positive a month before that. The foreign and local issuer default rating was affirmed at BB-, three steps below investment grade. S&P kept its long-term foreign debt rating at BB-, its long-term local debt rating at BB and its short-term sovereign credit rating at B, the company said in a statement in July. The outlook remained „stable,” S&P said. (Bloomberg)