Ukraine downgraded to selective default by S&P after missed international bond payment

Default rating, however, may not last long once Kyiv's debt restructuring takes effect, says agency

Shopping for basic commodities at a market in Lviv, Ukraine. The country's GDP posted 5 per cent growth in 2023, and is expected to expand between and 4 per cent in 2024, according to International MoShow more

S&P Global has downgraded Ukraine's sovereign credit ratings to selective default, after the country missed an international bond payment this week as its debt is restructured.

The nation missed a $34 million coupon payment on its 2026 Eurobond due on Thursday and has a grace period of 10 business days to fulfil it.

After President Volodymyr Zelenskyy signed the suspension of bond payments into law while Kyiv completes its restructuring, New York-based S&P said it did “not expect the payment” within that period.

As a result, S&P lowered Ukraine's long and short-term foreign currency ratings to “SD”, or selective default – which would be further lowered to “D”, the lowest level indicating full default that is also known as junk territory.

“We would lower our ratings on Ukraine's other Eurobonds to 'D' upon non-payment of interest or principal on those obligations as per their original terms, or if their restructuring has been confirmed,” it said.

Before Russia began its invasion in February 2022, S&P had given Ukraine a “B” rating, which was seven levels above junk and five below investment grade.

S&P's decision follows a similar move by Fitch Ratings, which on July 24 also downgraded Ukraine's credit rating to “C” from “CC”, just one level above default.

Non-investment grade makes it more difficult for a country to have access to capital markets and raise funding when it wants to borrow.

S&P's action also comes after Kyiv has made a payment of around $200 million to holders of its gross domestic product warrants, or securities that are not included in last week's agreement with private bondholders.

“We understand that Ukraine's government is not intending to make debt service payments on affected Eurobonds during the restructuring negotiations,” it said.

S&P, however, does not expect Ukraine to stay in default territory for long, saying it would consider the default as “cured” when the foreign currency commercial debt restructuring takes effect, and would raise its rating from “SD”.

“The government's ability and medium-term incentives to meet its financial commitments in local currency are somewhat higher compared with those in foreign currency,” it said.

“A default on these local currency obligations would amplify banking sector distress, increasing the likelihood that the government would have to provide the banks with financial support and limiting the benefits of debt relief.”

Russia's military operation in Ukraine plunged the latter into a deep economic and political crisis. However, the nation has been able to gradually recover.

The war had dragged Ukraine's economy to a 29.1 per cent contraction 2022, data from the International Monetary Fund shows.

Its GDP then rebounded and posted 5 per cent growth in 2023, with expectations of expansion between and 4 per cent expansion in 2024, the Washington-based fund said.

Ukraine's economy “was more resilient than expected in 2023, with robust growth out-turns, continued sharp disinflation and the maintenance of adequate reserves”, the fund had said.

However, problems have re-emerged in 2024, with growth expected to soften due to uncertainty about the continuing war and as supply constraints become more binding.

“The outlook remains subject to exceptionally high downside risks arising from war-related factors, potential shortfalls in external financing and the socio-economic impact of policies that may be required if shocks materialise,” it said.

Damages inflicted upon Ukraine's infrastructure as of January 2024 was estimated at about $155 billion, latest data from the Kyiv School of Economic showed.

Direct damages to industry and businesses have surpassed $13 billion, with nearly 80 small, medium and large private companies, as well as 348 state-owned enterprises, having been destroyed or damaged, it said.

However, since the 2022 decline, Ukraine's economy, as predicted by economists, has gradually recovered: GDP rose by 10 per cent annually to nearly $179 billion in 2023, the World Bank data showed.

The “significant” economic pressure, alongside those coming from external and fiscal factors, makes Ukraine's debt restructuring more challenging, S&P said.

“Areas occupied by Russian forces account for some 15 per cent of Ukraine's territory and 8 per cent to 9 per cent of its pre-war GDP,” it said.

“If the economy started to recover, considering the toll the war has taken on Ukraine's economy, we do not expect real GDP to recover to its pre-war level in our forecast period through 2027.”