Ratings agency Fitch cut Ukraine's sovereign outlook to negative on Thursday, warning of deteriorating economic fundamentals and a rising risk of a currency crisis. Fitch, which rates Ukraine as BB-, said a sharp drop in the currency would exacerbate already high inflation, affecting asset quality in the banking system where 51 percent of loans were denominated in foreign currency. It warned a further rise in risk of an external financing crisis would likely trigger a downgrade.

 

We seeno immediate danger of a currency crisis in Ukraine. The recent depreciation from USD/UAH 4.67 to USD/UAH current 5.07 is mainly triggered by the exit of non-resident investors selling Ukrainian bonds and equities. Due to the relative small size of the Ukrainian capital market, we think that this process will more sooner than later come to an end. The national Bank did not intervene in support of the UAH in recent weeks, which supports our opinion of the temporary nature of the depreciation.

Regarding the mid- and long term prospective we agree with Fitch in the assessment of a widening C/A deficit (from estimated 6.7 % of GDP or USD 13.6 bn in 2008 to around 10% or USD 23 bn next year).

Currently, short term external debt (USD 28.1 bn) accounts for 28% of total debt, and is distributed almost equally among banks (USD 12.8 bn) and the corporate sector (USD 15.4). However, banks’ effective market refinance need is lowered by the fact, that many Ukrainian banks are foreign owned and may count on the help from their parent organisations. Additionally, 80% of corporate short-term debt is composed of trade credit, which do not have to be refinanced on capital markets. Thus, we assess the effective volume of needed refinance as still manageable.

As conditions on global financial markets could deteriorate further and aggravate the access to capital, one cannot exclude a negative scenario for the UAH.

Nevertheless, based on our scenario of soft landing of the Ukrainian economy (growth slightly below 5% in 2009) and a continued reduction of bank lending growth we expect only modest depreciation of the currency.