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The escalation of the political crisis in Ukraine triggered a new wave of discussions about an imminent default of the country. Rating agencies were traditionally the first to react
Last week Fitch announced possible revision of the country’s sovereign rating at the end of February pointing to a high level of economic and political uncertainty in the country. Standard&Poors was even quicker. Last week, the agency downgraded the long-term and short-term sovereign credit ratings of Ukraine in foreign currency from B-/B (the obligor currently has the capacity to meet its financial commitment on the obligation, but unfavorable economic conditions will likely impair the obligor´s capacity to meet its financial commitment) to CCC+/C (the obligor experiences difficulties in meeting its commitments and his possibilities depend on favorable economic conditions).
Also, the outlook was lowered from ‘stable’ to ‘negative’. “Political instability in the country has deepened. We now assess Ukraine under our criteria as exhibiting characteristics of a ‘distressed civil society with weakened political institutions,’ thus lowering the government’s capacity to maintain timely debt servicing,” S&P said in a statement.
The analysts interviewed by KW see no reasons for panic so far. The agreement with Russia on the US $15 bn loan is still in force. Russian President Putin publicly confirmed that the Kremlin is not planning to revise conditions of the deal due to the change of government. This means that Ukraine will have the funds to meet its commitments (the total volume of payments on currency debts in 2014 will amount to slightly over US $7 bn). “However, even if these agreements are threatened by a change of power in the country, the new government will be able to agree on a new program with the IMF. In that case, Ukraine will be able to expect even cheaper loans required for maintenance and development of the economy,” says Oleksandra Betliy, a leading expert at the Institute of Economic Studies and Political Consultations.
Ukraine’s reputation as a borrower has certainly seriously tainted. Lately, investors have preferred not to purchase sovereign bonds of the country, which is turning into the turmoil of political events. They, however, are very sensitive to any positive changes. For instance, after the resignation of Mykola Azarov the profit margins of Ukrainian Eurobonds dropped to the level of mid-December 2013, when the news about the Kremlin loan to Kyiv appeared on the markets.
The mass disorders that have enveloped the country since the middle of January will not be a disaster for the economy. “In the worst case scenario, the events will deduct no more than 0.1-0.2% from the GDP growth indicator for Q1. According to our assessments the GDP decrease in Q1 will be around 1%. Even without aggravation of the political crisis, however, the indicator would have been approximately the same,” says Oleksandr Zholud, an expert analyst at the International Center for Policy Studies.
There are, however, other apocalyptic forecasts for the Ukrainian economy. “Conflict escalation in Ukraine will harm its economy. Indicators of Turkey’s and other countries, which recently experienced similar events, can be analyzed. The damage inflicted on Turkey’s economy as a result of mass protests in mid 2013 is estimated at US $9 bn,” said Valeriy Kucheruk, head of the Hryhoriy Skovoroda Analytical Group.
“Indeed, the crisis carries a threat primarily to investments. In the first month of the year, however, the volumes of capital investments into the economy are traditionally low. If the situation is settled over the next several weeks, the impact of the events in January on investments will be insignificant,” believes Betliy. The country is not paralyzed by the mass strikes that the opposition leaders called for. That is why the majority of companies continue to operate stably. In addition, the well-being of Ukrainian production, export-oriented companies being its core, depends more on external demand than on internal cataclysms.
The possible confrontation with Russia carries a much larger risk for production. The mass media have again spread information about Moscow’s readiness to declare a new trade war against Ukraine. In particular, the talk is about plans to introduce a regime of 100% inspection of goods imported from Ukraine, which could lead to a full suspension of its export to Russia. However, these rumors may turn out to be just another speculation on a pressing issue.
The economy may suffer also if the uncertain situation is protracted for a long period of time. In that case, as head of the Analytical Department at SP Advisors Vitaliy Vavryshchuk claims, a sharp decrease in consumption may be expected: people will begin more actively saving their money for a rainy day. In their turn, companies will continue to freeze investments into development, which will trigger a further decrease in the country’s GDP.Printable version