The military stand-off heightens Ukraine’s risk of default. A combination of factors could render Ukraine unable to meet its external debt-servicing and repayments obligations, according to Lilit Gevorgyan, Senior Sovereign Risk Analyst, IHS.
First, protracted political instability and fear of military action will continue to put pressure on the hryvnia, which has already lost ground, hitting UAH11.0:USD1.00. The new head of the National Bank of Ukraine (NBU), Stepan Kubiv, has indicated that the bank will effectively abandon the quasi-peg and let the currency float. However, should the currency devaluation accelerate, this may put pressure on the NBU to react, using its already dangerously low international currency reserves on interventions.
Second, the risk could rise if Russia insists on prompt payment of Ukraine’s overdue USD1.5-billion worth of gas arrears for 2013 and early 2014, and discontinues the 33% gas price discount agreed with the previous government in December 2013, which is due for review on 1 April.
Third, and most importantly, without the expected financial assistance from Western donors, Ukraine is likely to default. The US and EU have already stated that at least USD4 billion in loan guarantees will be available in the very short term. This should prop up the NBU’s foreign-currency reserves, which are estimated to have sunk to USD16 billion, not enough for a minimum three-month import cover.
“The International Monetary Fund (IMF) and European Commission are already dispatching their missions to give an independent assessment of Ukraine’s external liquidity needs, which the current coalition government puts at USD35 billion over the next two years. However, for the IMF to commit any sizeable assistance to help Ukraine would require a more stable government able to exercise its power across the country and ready to shoulder austerity measures.
“This is likely to be after the 25 May presidential vote, which would also help to lend much-needed electoral credibility to Ukraine’s new authorities. IHS has assigned 65 on a 100-point rating scale to medium-term government bonds, defined as Extremely High Payment Risk and equivalent to CCC on the generic scale. The short-term credit rating is at 55 or High Payment Risk (B on the generic scale). Both ratings have a Negative outlook.”