Moody's Investors Service downgraded Ukraine's foreign and local currency government bond ratings to B2 from B1, and assigned a negative outlook, mainly to reflect the continuing fragility of both the Ukrainian macroeconomy and its banking system.
“A supplementary reason for the downgrades is the uncertainty generated by a series of capital controls implemented by the National Bank of Ukraine (NBU) to ration foreign currency,” said Moody's Vice President Jonathan Schiffer. “These controls have already contributed to a foreign payments default by one of Ukraine's banks.”
Schiffer said that such capital controls heighten the possibility of default by Ukrainian corporations and banks on foreign currency debt payments if they remain in place, especially coming on top of existing controls on both domestic and foreign currency term bank deposits.
“Tighter NBU regulatory intervention may in turn have negative consequences for both domestic and foreign investments in future,” warned Schiffer.
The analyst said there has been some good news for Ukraine recently, when the International Monetary Fund released the 2nd and 3rd tranches of Ukraine's 2-year stand-by agreement. In addition, there has been continued, steady progress on the bank restructuring and recapitalization project carried out jointly by the National Bank and the IMF.
Still, said Schiffer, Ukraine's macroeconomic situation has deteriorated and non-performing loans continue to escalate rapidly, posing further risks to the banking system and, ultimately, currency stability. He said that such risks are complicated by continued political rivalry between the Prime Minister and President in the run-up to the forthcoming Presidential election, currently scheduled for autumn. This competition is also influencing economic policy and institutions via the medium of both budget formulation and activities of the National Bank and will continue to cause tensions in government discussions with the IMF.
The negative outlook on key Ukrainian sovereign credit ratings means that Moody's will continue to monitor closely the ability of both the government and the National Bank of Ukraine to deal with the economic and financial stresses. A key focus will be the bank recapitalization scheme; Moody's will continue to monitor this activity closely to weigh the final costs and consequences.
In related rating actions, Moody's also downgraded the foreign currency country ceiling for bonds to B1 from Ba3, and the ceiling for foreign currency bank deposits to B3 from B2, both with a negative outlook. The local currency country bond ceiling was also downgraded to Ba1 from A3, while the local currency bank deposit ceiling rating was affirmed at Ba1.
The last rating action with respect to Ukraine was implemented on February 24, 2009, when the government's B1 ratings as well as the B2 foreign currency bank deposit country ceiling and Ba3 foreign currency bond country ceiling were placed on review for downgrade. (press release)