UKRAINE: FITCH affirmed Ukraine at B- with stable outlook
Among key rating drivers, the agency underlined Ukraine's balance of weak external liquidity, high external financing needs driven by sovereign external debt repayments, a weak banking sector, institutional constraints and political risks related to peers, against improved policy credibility and consistency, improving macroeconomic stability, declining government debt and a track record of bilateral and multilateral support.
FITCH expects average inflation to drop further to 8.6% in 2019, still above the forecast 4.9% 'B' median, and decline to 6.2% by end-2020. General government debt dropped to an estimated 52.2% of GDP in 2018, below the 59% 'B' median, on the back of sustained primary surpluses in real exchange rate appreciation, return to growth and reduced net foreign financing. The agency expects growth to slow to 2.6% in 2019, down from 3.2% in 2018, due to tighter monetary and fiscal policies, weakening global demand conditions and commodity prices, and more moderate wage increases. Investment (estimated at 20.5% of GDP in 2018) will likely remain below 'B' peers (22.3%) reflecting concerns regarding rule of law and political uncertainty during the electoral cycle.
The financial sector continues to represent a contingent liability for the nation, due to the large share of state-owned banks (58.9% of total assets) and weak asset quality. Near-term risks have declined due to improved capitalization and a more favorable macroeconomic backdrop. Deposit and credit dollarization are high, but declined to 42% and 42.8%, respectively, in 2018.
FITCH does not expect a resolution for the conflict in eastern Ukraine nor escalation of the conflict to the point of compromising overall macroeconomic performance. The agency assumes that the debt dispute with Russia will not impair Ukraine's ability to access external financing and meet external debt service commitments.