Fitch affirms Ukraine's junk rating amid possibility of further debt restructuring

Ratings agency forecasts restructuring before the two-year standstill on Eurobond payments expires in September 2024

Civilians with captured weapons of war in Mykhailivskyi Square, Kyiv. Ukraine will need large-scale and expensive reconstruction efforts whenever conflict with Russia ends, the UN said. Getty

Fitch Ratings has affirmed Ukraine's long-term foreign currency issuer default rating at “CC”, on expectations of more restructuring of its external debt.

A restructuring is projected to happen before the two-year standstill on Eurobond payments expires in September 2024, the New York-based company said on Friday.

It said that the 24-month payment deferral that took effect in August 2022 “constituted a distressed debt exchange [DDE]” under Fitch's sovereign rating criteria, it said.

Fitch did not assign an outlook, as it typically does with sovereigns rated “CCC+” and below. Ukraine's “CC” rating puts it just two levels above default territory and 10 steps below investment grade on the company's ratings scale.

Despite the expectations of the further restructuring, the specifics of the undertaking remains unclear, according to Fitch.

Ukraine in March secured the backing of the International Monetary Fund's staff for a $15.6 billion loan programme, having reached a staff-level agreement on a four-year comprehensive funding.

“The authorities would likely prefer a single comprehensive debt restructuring next year, but if security-related uncertainty precludes this, we would still anticipate an intermediate step of further deferral on Eurobond payments, triggering another DDE,” Fitch said.

The rating is also non-investment grade, which means the country and companies in it will find it more difficult to access capital markets and raise funding.

“External sovereign debt service rises to $7.6 billion in 2025, large fiscal deficits into the medium term will add to already high public debt and burden sharing with commercial creditors is a likely condition of continuing official sector support,” Fitch said.

Ukraine's economy has been ravaged since it was invaded by Russia in February. According to the Kyiv School of Economics, the estimated damage to infrastructure stood at $138 billion as of December 2022, equivalent to 70 per cent of 2021 gross domestic product.

GDP contracted by more than 30 per cent in 2022, according to preliminary national data. Whenever the conflict ends, Ukraine will need large-scale and expensive reconstruction efforts, the UN said in a recent report on the first anniversary of the war.

Fitch expects an under-execution of a planned $14 billion of critical infrastructure spending this year.

The conflict has also added pressure to the global economy, hitting economic activity, adding to inflationary and commodity price pressures, impeding the post-pandemic recovery and disrupting supplies, the UN said.

Fitch projects Ukraine's GDP to grow 3.5 per cent in 2023 and 4 per cent in 2024. It also expects some recovery in consumption as fears of a broader military escalation dissipates, but investment is forecast to remain “depressed”.

Large fiscal deficits are also expected to persist, with the general government deficit expanding by 12 percentage points in 2022 to almost 16 per cent of GDP, driven by military spending, the agency said.

Fitch projects a deficit of 17.3 per cent of GDP in 2023 as “a full year of war-related expenditure and a reduction in the grant component of budget support offset moderate real-term cuts in recurrent social spending”.

“We anticipate the deficit remains high into the medium term, partly given huge reconstruction needs, and structurally higher defence outlays than prewar,” it said.

Fitch also noted Ukraine's high dependence on official financing, with the committed budget aid support for 2023 totalling $43 billion and could rise with additional financing from the US finance in the fourth quarter.

The outlook for 2024 commitments remains unclear, but said it expects it to be at a broadly unchanged level.

“Despite the EU's €50 billion [$54.6 billion] funding proposal to 2027, we see greater financing uncertainty beyond next year, partly due to potential for donor fatigue,” Fitch said.