Ukraine Markets Daily (February 16, 2015)

Market news

  • Fitch downgraded Ukraine’s long-term foreign currency issuer default rating to ‘CC’ from ‘CCC’
  • The government prepared changes to the state budget for 2015
  • President Poroshenko ordered the Ukrainian forces to cease fire

Market comment

The UX Index was up by 0.1% in UAH terms on Friday, and up by 2.4% in the US dollar terms, while the PFTS index was up by 2.7% in UAH terms. Four out of ten companies in the UX index were up in the UAH terms with the largest increase in prices observed for Azovsteel (3.7%), Ukrnafta (2.0%) and Bank Aval (1.7%). 

On the interbank exchange market, the USD/UAH spot rate was down by 2.2% with the closing price of 26.10 (mid price) on Friday. The official exchange rate reported by the NBU was 25.92.

Ukraine 5-year CDS were down by 0.1% on Friday.

 

Fitch downgraded Ukraine’s long-term foreign currency issuer default rating to ‘CC’ from ‘CCC’

Fitch Ratings has downgraded Ukraine's long-term foreign currency issuer default rating (IDR) to 'CC' from 'CCC' and affirmed its local currency IDR at 'CCC'. The issue ratings on Ukraine's senior unsecured foreign currency bonds have been downgraded to 'CC' from 'CCC', while the senior unsecured local currency bonds have been affirmed at 'CCC'. The country ceiling has been affirmed at 'CCC' and the short-term foreign currency IDR at 'C'. The downgrade of Ukraine's Long-term foreign currency IDR to 'CC' indicates that a default of some kind appears probable.

The new IMF program announced on 12 February 2015 will help to close Ukraine's financing gap, but an associated restructuring of privately-held external debt appears increasingly probable. Sovereign creditworthiness has deteriorated. The consolidated fiscal deficit, including losses of state energy company Naftogaz, reached 13% of GDP in 2014. Fitch estimates that direct and guaranteed debt rose to 72% of GDP in 2014. Conflict and economic weakness have led to large additional financing needs beyond those envisaged in Ukraine's IMF program agreed in April 2014.

Moreover, announcement of a restructuring operation with private external creditors, failure to make progress on structural reforms leading to a suspension of the IMF program or further escalation of the conflict in Eastern Ukraine could result in further rating downgrade.

Our view:

The news is negative for sovereign and quasi-sovereign Eurobonds of Ukraine. Fitch has reacted to the IMF claims that Ukraine would receive some portion of international support in form of debt restructuring. At the same time no details on the conditions of restructuring are provided as the negotiations with the bondholders seems to be in progress.

 

The government prepared changes to the state budget for 2015

According to Ukraine’s prime-minister Arseniy Yatsenyuk, on February 14 the Cabinet approved changes to the law on the state budget of Ukraine for 2015. Increase of the revenues by UAH 22 bn constitutes the only known change to the state budget. Mr Yatsenyuk promised that the proposed changes to the budget would be registered in Verkhovna Rada on Monday, February 16, and the parliament would vote on the respective changes to the budget and corresponding laws not later than February 25. After this the executive board of the IMF would be able to approve the new extended facility fund program.

Our view:

The news is neutral for Ukrainian economy as the details on the changes to the state budget are absent. The government almost followed the deadline as earlier Mr Yatsenyuk promised to make changes to the state budget till February 14. At the same time further increase of projected revenues of the budget looks absolutely unrealistic, that’s why tough discussion at the parliament could be expected.

 

President Poroshenko ordered Ukrainian forces to cease fire

On February 15, Ukraine’s President Petro Poroshenko, following agreement reached in Minsk, ordered the Ukrainian army to stop military actions against terrorists in the Eastern Ukraine. As the observers note, the pro-Russian terrorists have not totally ceased fire, but made only local firing. At the same time, the area near Debaltsevo (Donetsk region), currently being held by the Ukrainian forces, suffered from the firing the most.

Our view:

The news is moderately negative for Ukraine. President Poroshenko clearly hopes to maintain truce, while the terrorists keep efforts to provoke the Ukrainian forces. While the Ukrainian top-officials do not rush to react on local firing, in the worst case, President Poroshenko may declare a martial law if terrorists continue to violate the ceasefire.

 

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