KIEV, Ukraine, Dec 26 – Ratings agency Standard and Poor’s on Thursday raised its outlook for Ukraine to stable from negative, saying a multi-billion dollar bailout deal from Russia should mean Kiev meets its external financing needs over the next year.
The outlook change means that Standard and Poor’s is now less likely to further downgrade its ‘B- /B’ assessment of Ukraine’s creditworthiness on its sovereign debt, which remains deep into junk status.
Russian President Vladimir Putin last week agreed after talks with Ukrainian President Viktor Yanukovych to buy $15 billion of Ukrainian government debt and also slash the price Ukraine pays for Russian gas by one third.
Standard and Poor’s said the cash injection of $15 billion — about 8 percent of Ukraine’s predicted 2014 GDP — “should cover the government’s external financing needs over the next 12 months.”
It added that “based on our expectations of Russia’s support” Standard and Poor’s no longer expected a devaluation of the Ukrainian hryvnia.
But the agency also warned that the Russian support appeared subject to good diplomatic relations between the two ex-Soviet states being maintained.
The Kremlin offered Kiev the package after it rejected a pact for closer ties with the European Union which was strongly opposed by Moscow. The rejection sparked mass protests in Kiev.
“We understand that Russia could revise this financial aid on a quarterly basis,” Standard and Poor’s said.
“Ukraine’s financial dependence on Russia will increase if market conditions do not afford the government the opportunity to issue debt to international capital market participants other than Russia, or if other sources of financing are not found.”
It also said that the package from Russia means that Ukraine was not expected to commit to broad economic reforms, as demanded by the International Monetary Fund and the European Union.
Such reforms would include creating a more market-oriented domestic gas market, resolving non-performing loans, increasing exchange-rate flexibility and fiscal consolidation.
It said it could raise ratings if Ukraine “were to embark on a reform program likely to lower external and fiscal deficits.”