KYIV

Fitch Ratings has revised the outlook on Ukraine’s long-term foreign-currency Issuer Default Rating (IDR) to Stable from Positive and affirmed the IDR at ‘B’.

“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,” Fitch said in a report.

The agency said that the Stable outlook partly reflected its base case that full-scale military conflict with Russia would be avoided and that the somewhat greater availability of IFI and bilateral finance, Ukraine’s credible macro-policy framework and strengthened fiscal and FX reserves position coming into 2022, would help mitigate impacts.

Fitch said that there was a high degree of uncertainty about the near-term strategic objectives of President Putin, and the increased risk of an invasion reflected the extended period of troop build-up along Ukraine’s border, weak prospects for agreement on the core demands articulated by the Russian administration, and the heightened preparatory response by the U.S.

“Our base case that there is not a full-scale military invasion is partly due to the likely economic, military, and geopolitical cost and risks to Russia, the absence of firm domestic popular support for such action, and to a lesser extent, the potential for some limited policy concessions – set against the uncertain strategic gain,” the agency said. “However, we expect a protracted period of elevated tensions and risk, and see a somewhat higher probability of more contained military operations such as in the Donbas region.”

Fitch said that the ‘B’ rating was supported by Ukraine’s credible macroeconomic policy framework (underpinned by exchange rate flexibility, commitment to inflation targeting, and prudent fiscal policy), a record of multilateral support, favourable human development indicators, a net external creditor position of 9 percent of gross domestic product (GDP), and public debt below the ‘B’ median.

Set against these factors are weak governance indicators and exposure to geopolitical risk, low external liquidity relative to a large sovereign external debt service requirement, and legislative and judicial risk to policy implementation, the agency added.