Moody’s Investors Service (“Moody’s”) on June 12 upgraded the Government of Ukraine’s long-term issuer and senior unsecured ratings to B3 from Caa1.
The agency’s outlook on the ratings is “stable.” The upgrade comes on the back of the International Monetary Fund (IMF) approving an 18-month Stand-by Arrangement (SBA), worth roughly $5 billion, but Ukraine is still expected to have a funding shortfall this year, and will likely need to issue public debt.
Investor appetite for emerging market countries is returning after record outflows at the onset of the COVID-19 pandemic, however, market appetite for Below Investment Grade countries is not assured.
Moody’s’ upgrade of Ukraine came after the SBA was approved and evaluated; the IMF program was sufficiently easing Ukraine’s near-term funding challenges as well as the safeguarding of recent improvements.
“At present, the humanitarian and economic crisis stemming from the COVID-19 pandemic has refocused policy priorities away from deep structural reforms,” IMF managing director Kristalina Georgieva, said.
The SBA conditionality will attempt to refocus Ukrainian authorities on what the IMF has outlined as priorities: (i) mitigating the economic impact of the crisis, including by supporting households and businesses; (ii) ensuring continued central bank independence and a flexible exchange rate; (iii) safeguarding financial stability while recovering the costs from bank resolutions; and (iv) moving forward with key governance and anti-corruption measures to preserve and deepen recent gains.
The IMF specifically pushed Ukraine to pass legislation safeguarding the banking sector clean-up. The bank reform legislation blocks previous owners of nearly 100 banks, which were liquidated or nationalized under the banking sector clean-up, from reclaiming ownership or obtaining compensation through Ukrainian courts. This legislation, passed on May 13, came after special measures were implemented to thwart legislators from derailing the passage.
There was a higher level of uncertainty around Ukraine’s ability to pass this legislation. It was assumed that former owners of nationalized banks, such as President Volodymyr Zelensky’s key political supporter, oligarch, and former owner of PrivatBank, Igor Kolomoisky, would pressure lawmakers away from the legislation.
“At present, the humanitarian and economic crisis stemming from the COVID-19 pandemic has refocused policy priorities away from deep structural reforms”
PrivatBank was taken over by the central bank for a $5.5 bln hole in its balance sheet due to fraudulent lending.