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Fitch downgrades outlook for Ukraine: What is the cause

The international rating agency Fitch Ratings announced on January 4 that it had downgraded its outlook of:

  • Ukraine's rating from "positive" to "stable", but kept the rating at ‘B’ level;
  • Ukraine's GDP growth in 2022 from 3.9% in the August outlook to 2.9%.

It should be noted that international investors pay a close heed to the opinion of the rating agencies. When outlooks deteriorate for any country, its borrowings on world markets become more expensive, direct investment in the economy decreases, and the outflow of investor funds increases.

Why Fitch downgraded Ukraine's rating outlook

"Expectations of a more protracted period of heightened tensions with Russia, an increased downside risk of conflict, constrained financing conditions, moderate capital outflows and weakening international reserves, have increased external financing risks since our previous review in August," the agency explains.

The ‘stable’ outlook partly reflects the agency’s base case that full-scale military conflict with Russia will be avoided. At the same time, the agency considers the increased likelihood of "more contained military operations such as in the Donbas region."

Ukraine's slightly increased access to international financing, macro stability achieved in the country, and a high level of foreign exchange reserves will help mitigate the consequences of the current situation.

Why Fitch downgraded Ukraine's GDP outlook

The GDP outlook was downgraded due to slowing growth in real wages and private consumption, slumping domestic demand amid heightened geopolitical risk, and the high gas prices.

Inflation will remain at around 10% in the first half of 2022 with an increase in the NBU discount rate to 12%, the agency reports. At the end of 2022, it will fall to 7.9%.

Measures to raise taxes by 0.5 percentage points (pp) will help offset current expenditure pressures and expected gas subsidies.

The agency notes a decrease of public debt to GDP of 9.2 p.p. in 2021—to 44.3% (50.2% including guarantees). The forecast for this figure at the end of 2023 is 42.2%. At the same time, Fitch notes that the projected share of government debt to GDP at the end of 2023 for countries with a ‘B’ rating has a median of 67.6% (that is, half of the countries have a lower figure and another half have a higher figure).

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