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London – Rating agency Moody's Investors Service downgraded Ukraine's credit rating by one notch deeper into the speculative zone to Ca. It changed the rating outlook to stable from negative, which means that it does not plan to change the country's rating in the coming months. This follows from the agency's statement. The reason for the deterioration of the rating is the effects of the war with Russia, which will probably represent long-term problems for the Ukrainian economy and public finances.
Ukraine's grade is now just one notch away from a very high probability of failure. According to Moody's, the country's current problems raise risks to the government's debt sustainability, making a debt restructuring highly likely with significant losses for private sector lenders.
Moody's estimates that Ukraine's real gross domestic product (GDP) fell by about 30 percent last year. The private sector has shown a certain degree of resilience and gradually adapted to the challenging conditions, and significant donor support is provided for repairs and reconstruction. But the war will cause long-term damage to important economic sectors, mainly due to intensified attacks on critical infrastructure.
In the base scenario, Moody's assumes that the war will drag on and the economy will see a slight drop in real GDP by two percent this year. This decline should be followed by a recovery next year. Despite major financial support from foreign partners, the agency expects the war to continue to put public finances under severe pressure. The public finance deficit excluding grants should amount to 30 percent of GDP in 2022, the provision of significant external support reduces this figure to 17 percent of GDP. This year, the budget is expected to continue to be under significant pressure due to defense and social spending. However, including grants, the deficit should be reduced to around eight percent of GDP.
Government debt is also growing rapidly. Moody's estimates that it rose almost 35 percentage points to 82 percent as a ratio of GDP at the end of the year. It should exceed 90 percent of GDP at the end of this year.
The credit rating is an important guide for investors, as it shows them the likelihood of proper repayment of loans. It has a significant influence on the willingness of lenders to lend to the relevant state or other entity, as well as on the terms of the loan, for example the interest rate. The higher the rating, the better the borrower is perceived in the eyes of creditors and the more likely it is that he will be able to secure cheaper loans. If the rating is in the speculative zone, large institutional investors, such as pension funds, cannot invest in the bonds of the given entity.