Moody's Investors Service (Moody's) has today upgraded the government of Ukraine's local and foreign currency issuer and senior unsecured ratings to Caa2 from Caa3, and changed the rating outlook to positive from stable. Consequently, Moody's has upgraded to Caa2 from Caa3 the ratings of Ukraine's nine senior unsecured eurobonds issued in the context of the government's debt exchange operation in November 2015.
At the same time, Moody's affirmed the Ca senior unsecured rating of the government's USD3 billion bond sold to Russia in December 2013. The bond is currently in default.
Moody's also upgraded the backed long-term foreign-currency issuer rating of Financing of Infrastructural Projects (Fininpro) to Caa2 from Caa3, and changed the rating outlook to positive from stable. Fininpro's debt is fully guaranteed by the Ukrainian government.
The upgrade of Ukraine's government ratings to Caa2 from Caa3 is based on the following key drivers:
1. The cumulative impact of structural reforms that, if sustained, are expected to improve government debt dynamics;
2. The significant strengthening of Ukraine's external position.
The rating upgrade was constrained to one notch because Ukraine faces a heavy external debt servicing burden over the next several years that will require additional foreign currency funding beyond what official lenders are likely to provide. Moreover, both domestic politics and geopolitical tensions could disrupt Ukraine's access to private capital markets as well as weaken the currency, with corresponding adverse implications for the government's debt metrics and economic stability.
Still, the positive rating outlook captures the momentum of reforms that, if sustained, could lead to further improvements in Ukraine's public and external debt sustainability. Such reform momentum would also support Ukraine's renewed access to global capital markets, which would provide an easier route to refinancing significant external debt payments from 2019 onward. Ukraine could also anticipate those payments through proactive debt management operations.
Concurrent with today's rating action, Moody's has raised the country ceiling for foreign currency bonds to Caa1 from Caa2, whereas the country ceiling for foreign currency deposits has been raised to Caa3 from Ca. The country ceilings for local currency debt and deposits have been raised to Caa1 from Caa2. The short-term foreign currency country ceilings for deposits and bonds remained at Not Prime (NP). Country ceilings generally determine the highest rating that can be assigned to obligations of an issuer resident within a given country.
