Ukraine Default Is ‘Far From Inevitable’

S&P Predicts No Ukrainian Sovereign Default This Year Amid Political Uncertainty

– January Presidential Election Raises Concerns
– Banking Sector Facing Significant Challenges

By Kiryl Sukhotski

Moscow, Aug 4 (Reuters) – Standard & Poor’s has indicated that a Ukrainian sovereign default is "far, far from inevitable," although the upcoming presidential election in January, which it seems incumbent Viktor Yushchenko may not win, casts uncertainty over the country’s credit outlook.

Last week, S&P upgraded its outlook on Ukraine’s ‘CCC+/C’ rating from "negative" to "positive" after the country secured a $3.3 billion deal for a third tranche from the International Monetary Fund to help meet its external debt obligations and budgetary needs.

"We certainly don’t expect a sovereign default this year, and a sovereign default is far from inevitable in Ukraine," Frank Gill, S&P’s director of European sovereign ratings, told Reuters Television. However, he emphasized the need to monitor the political situation in January, citing ambiguities in the constitution regarding the separation of powers as a key credit concern.

Political instability has been a persistent issue in Ukraine since the pro-Western "Orange Revolution" in 2004, significantly impacting both reforms and economic growth. Ongoing tensions between Yushchenko and his former ally, Prime Minister Yulia Tymoshenko, have hindered necessary reforms and jeopardized the $16.4 billion IMF standby program.

Gill noted that the IMF has shown increasing flexibility since the agreement last November, allowing a budget deficit of up to 6 percent of GDP, which was a departure from the initial requirement of a balanced budget. "The IMF has been frontloading the lending, which has been crucial for Ukraine," he explained, mentioning that the country has received over $10 billion from the IMF program.

While he acknowledged the challenges in assessing Ukraine’s long-term debt servicing capacity, he highlighted unexpected positive developments, such as the government’s ability to avoid unpopular parliamentary votes, including raising consumer gas prices.

Concerns in the Banking Sector

Gill also expressed worries about the banking sector, which comprises over 180 banks, 16 of which are currently under temporary administration. Even though many of the largest banks are foreign-owned and have received some assistance, domestic banks are facing significant difficulties.

The hryvnia lost half its value at the end of last year, though it has since strengthened to 7.8/$ from a historic low of 9.5-10/$. However, many consumers who took out loans in dollars are struggling to repay them.

Igor Mazepa, CEO of Ukraine’s largest investment bank, Concorde Capital, reported that non-performing loan ratios in the banking sector range between 50-55 percent, predicting the exit of 50 to 70 banks over the next 18 to 24 months due to insufficient funding to support the sector.

"These institutions are likely to leave the market, as the banking sector is not equipped to sustain itself," he stated during an interview.

The banking industry has faced severe financial losses, with a reported deficit of nearly $2 billion in the first half of this year compared to a profit of $1 billion during the same period last year, primarily attributed to loan default provisions.