Our Comments

Dec 11, 2012

S&P cuts Ukraine rating to B, keeps negative outlook

Ukrainian Energy

The rating agency Standard & Poor’s cut Ukraine’s sovereign rating by one notch to B, citing significant external financing needs in 2013 and uncertain prospects for securing F/X funding to finance them. The agency retained its negative outlook on Ukraine, saying that “a sharp and sustained decline in net foreign currency reserves would put a downward pressure on the rating”.

Dragon Capital comments on the news: The downgrade by S&P followed a similar move by Moody’s on Dec. 6 (one-notch rating reduction to B3 with negative outlook maintained). As S&P’s Ukraine rating became two notches higher than Moody’s after Dec. 6, the one-notch downward adjustment that followed was quite logical and expected by us. Both agencies cited growing concerns over Ukraine’s external liquidity position and economic policy uncertainty among the key reasons for the downgrade.

Ukraine’s significant external financing needs in 2013 seem to be a well-known issue for the investor community, but abundant global liquidity has supported investors’ risk perception. However, investors’ tolerance may evaporate quickly if Ukraine’s economic policies remain uncertain in the coming months. In particular, any further delay in negotiations with the IMF (which is likely to trigger another rating downgrade) may compound negative sentiment towards Ukraine and cause Eurobond spreads and CDS to widen more significantly.

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