KYIV

Fitch Ratings has revised the outlook on Ukraine’s long-term foreign-currency Issuer Default Rating (IDR) to Positive from Stable and affirmed the IDR at ‘B’.

Fitch said that the rating was supported by Ukraine’s credible macroeconomic policy framework, a record of multilateral support, favourable human development indicators, net external creditor position of 11 percent of Gross Domestic Product (GDP), and lower public debt than the ‘B’ median.

Set against these factors are weak governance indicators and exposure to geopolitical risk, low external liquidity relative to a large sovereign external debt service requirement, and legislative and judicial risk to policy implementation, the agency said in a report.

Fitch forecasts Ukraine’s GDP growth of 4.1 percent this year, helped by a pick-up in agriculture and 12.9 percent real wage growth year-on-year in June, with short lockdowns in January and April subtracting an estimated 0.6 percentage points from annual growth.

The vaccination rollout has quickened over the last month but is low, at 13 doses per hundred people, and represents a downside risk to the forecast.

“We project GDP growth of 3.9 percent in 2022, slowing to 3.5 percent in 2023, which is close to our assessment of Ukraine’s trend rate,” Fitch said.

Inflation has risen sharply, to 9.5 percent in June, from 5.0 percent in December 2020, due to temporary supply-side factors but core inflation also increased to 7.3 percent.

“We forecast inflation remains elevated at 9.2 percent at the end of 2021 … and declines to 6.0 percent at the end of 2022, the upper end of the target range,” the agency said.

It said that last year’s replacement of the National Bank’s governor had increased the downside risk of looser-than-projected monetary policy.

Fitch said that despite the improved near-term financing position, continued engagement with the IMF remained key to maintaining access to external financing over a longer period.

Sovereign external debt amortisations are relatively high, averaging $5.0 billion in 2021-2023, albeit down from $7.0 billion last year.

Ukraine’s external liquidity ratio improved 10.5 percentage points in 2018-2020 to 85.1 percent but remains well below the ‘B’ median of 139.9 percent.

“There is also uncertainty over the capacity for the domestic banking sector to absorb higher government debt issuance over an extended period, despite its current ample liquidity,” Fitch said.