Moody's reduces ratings for Ukraine, Kyiv moves to ease investors' fears (07/26/98)

Moody's reduces ratings for Ukraine, Kyiv moves to ease investors' fears

Eastern Economist

NEW YORK - Moody's Investors Service on July 13 announced a deterioration from "stable" to "negative" in its outlook for Ukraine's B2 foreign currency country ceiling for bonds and B3 ceiling for bank deposits. According to Moody's, the gradual depletion of Ukraine's foreign currency reserves (nearly $1.75 billion U.S. at the end of June) over the past few months implies an increase in the risk of default on its foreign debt obligations.

Moody's said that if Ukraine is unable to borrow from financial markets and if the International Monetary Fund's Extended Fund Facility (EFF) program is not approved in the coming months, the country will run out of reserves before the end of the year.

The agency said that it will closely watch these financial market developments and will be assessing the country's ability to make payments on its $450 million (U.S.) Euronote maturing in August.

Over the medium term, the rating outlook will hinge on the ability of the government to push long-delayed structural reforms through a potentially hostile Verkhovna Rada. Moody's noted that it is worried also that the presidential elections scheduled for summer 1999 will lead to further political paralysis.

Valeriy Lytvytskyi, presidential economic advisor, moved quickly to ease investors' fears, claiming that Moody's will likely review its action if the Verkhovna Rada confirms President Kuchma's amendments to the 1998 budget and the IMF approves the EFF credit.

Former Minister of the Economy Viktor Suslov called the lowered Moody's rating an alarming sign, arguing that the current situation demands immediate measures to decrease the budget deficit and reduce the volume of Ukraine's foreign loans. He added that the government's economic policy must be re-examined and foreign investors granted immediate tax breaks.

Mr. Lytvytskyi announced on July 15 that President Kuchma will likely issue economic decrees that call for the end of VAT privileges, the elimination of anonymous bank accounts and the review of expenses associated with debt servicing prior to the arrival of an IMF mission later this month.

In order to comply with IMF conditions for the EFF credit, the Cabinet of Ministers will soon approve excise tax increases on alcohol and tobacco products, strengthen control over tax collections and consider sweeping administrative reforms, he added. Mr. Lytvytskyi speculated that if the IMF approves the credit the World Bank might revive its dormant loan programs.

Moody's action takes place against the backdrop of the rapid devaluation of the hryvnia over the last two weeks.

National Bank of Ukraine Chairman Viktor Yuschenko said on July 14 that the devaluation is the result of non-residents leaving the domestic T-bill market. In the first nine days of July, the chairman noted, non-residents took about $130 million (U.S.) out of the Ukrainian market; this figure is roughly double the amount taken out by foreigners during the same period in 1997. Non-residents currently hold 28 percent of the total volume of T-bills, a 22 percent decrease from January. However, Mr. Yuschenko reported, the volume of funds taken out of Ukraine by non-residents was 15 million to 20 million hrv lower than the NBU had predicted.

Nevertheless, the secondary T-bill market remains stable, he said, demonstrating that non-residents are still not ready to substantially reduce their stake in the market.

Mr. Yuschenko also blamed the hryvnia's devaluation on the deepening crisis in the international markets, including Russia, where the rates on state treasury bills were raised from 80 percent to 120 percent. These problems have spurred the NBU to spend $150 million (U.S.) during the period of July 1-13 in support of the national currency. Mr. Yuschenko said the total volume of operations at the currency market has not changed, indicating continued stability in the domestic currency market.