Fitch Ratings has affirmed Ukraine's ratings with a stable outlook, reads a press release posted on the rating agency's website.

"Fitch Ratings has affirmed Ukraine's Long-term foreign currency and local currency Issuer Default Ratings (IDRs) at 'B' with a Stable Outlook," reads the statement.

The agency also affirmed the Short-term IDR at 'B' and the Country Ceiling at 'B.'

"The affirmation reflects the finely poised external financing situation. International reserves of the National Bank of Ukraine (NBU) were steady in January-April 2012 at around USD 31 billion (or three months of current account payments) before posting falls in May and June, partly because of large external debt repayments. Pressure on reserves could re-emerge from Q312," reads the press release.

Fitch expects the current account deficit to reach 6% of GDP in 2012, but the main stresses are on the capital account. Household demand for foreign currency - which led to reserve falls in Q411 - appears to have picked up in June, and could accelerate.

Ukraine's external liquidity ratio is one of the lowest among Fitch-rated sovereigns at a prospective 55% in 2012. Private sector external debt accounts for much of the debt service due, but on aggregate, rollover rates have been over 100% since the crisis. Ukraine's limited ability to refinance sovereign external debt obligations risks pressure on the exchange rate and a decline in reserves.

The sovereign faces USD6.4bn in repayments and interest to the IMF in 2013, combining payments due from the government and the NBU. Fitch believes the government will likely re-access eurobond markets and IMF funding in 2013, allowing it to refinance IMF repayments, but will need to take the unpopular step of raising household gas tariffs in order to do so. By comparison, external market debt maturities are relatively low, at USD1bn in the remainder of 2012 and USD1bn in 2013.

Fitch's end-year exchange rate forecast reflects devaluation risks, which could lead to overshooting given fragile confidence in the hryvnia. A weaker hryvnia would increase the burden of external debt, including sovereign debt. Fitch notes that a more flexible exchange rate would help Ukraine absorb external shocks and adjust to movements in trading partners' exchange rates. The exchange rate has shown greater flexibility since May, weakening slightly from its post-crisis anchor of UAH 8 against the USD.

Fitch expects real GDP growth to slow to 2.4% in 2012 but recover to 3.5% in 2013. Economic performance is dependent on the highly cyclical steel sector, and growth is sensitive to a downturn in the global economy or a eurozone growth shock.

According to the press release, the Ukrainian government successfully narrowed the general government deficit to 4.2% of GDP in 2011 from 7.7% of GDP in 2010, but it will widen slightly in 2012. A supplementary budget in April 2012 lifted spending and may overestimate revenues, while losses at state-owned energy firm Naftogaz will increase.

As reported, in early September 2011, Fitch withdrew Ukraine's national rating of 'AA(ukr).'

In October 2011, Fitch downgraded Ukraine's outlook from "positive" to "stable."

UkrAgroConsult