Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the cases of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial-market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for Ukraine (long-term foreign-currency issuer and foreign senior unsecured debt ratings: CC/Negative; long-term local-currency issuer ratings and domestic senior unsecured debt ratings in local and foreign currency: CCC/Stable; short-term issuer ratings in local and foreign currency: S-4/Stable) on 24 October 2023.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated ratings history can be found on www.scoperatings.com.

Key rating factors

Ukraine’s foreign-currency long-term issuer and foreign-debt ratings of CC and Negative Outlook reflect an expectation of execution of an external debt treatment in the coming period – aligned with Scope Ratings’ baseline since 2022 of further debt renegotiation expected by mid-2024. In accordance, the Ministry of Finance of Ukraine announced on 24 March 2023 its intention for further treatment of the sovereign’s external commercial debt – for the anchoring of liquidity and addressing an external financing gap. Negotiations with foreign debtholders have recently launched, and are expected to be completed inside the coming months.

Furthermore, the Group of Creditors committed under an agreed “two-step approach” earlier this year to execution of a third and final debt restructuring for the restoration of Ukraine’s debt sustainability once the conflict situation is stabilised or at the latest by the termination of the IMF programme – e.g., latest 2027, provided private external creditors deliver a debt treatment at least as favourable.

Scope projects a rise of the general government debt ratio to 92% of GDP by 2028, from the 78.5% at end-2022 – the former roughly doubling the 49% ratio as of 2021 before Russia’s war on Ukraine. By comparison, the IMF’s baseline scenario sees sovereign debt peaking at 100.7% by the end of 2025 before declining to 94.6% by 2028 and 75.2% by 2033. The IMF envisages gross financing requirements normalising from wartime peaks of above 26% of GDP between 2023-2024 to below 10% a year by 2030.

Complementing actions of the international sector, Ukraine plans to augment domestic-bank financing of the sovereign for sustaining an elimination of monetary financing since January this year. The Ministry of Finance hiked rates on domestic debt to make it more marketable for commercial creditors. The National Bank of Ukraine allowed banks to meet half of their reserve requirements using specific government securities. The transition of the domestic banking system to net positive financing of the State starting this fiscal year following the net redemptions of 2022 eliminates macroeconomic risk from central-bank financing and curtails the likelihood of domestic debt restructuring short to medium-run.

According to baseline Scope projections, 5.5% growth is estimated this year before 3.5% growth in 2024.

The foreign-currency long-term issuer ratings are expected to be downgraded during the coming period to C should: negotiations prudently advance for the further restructuring of foreign debt instruments. Conversely, the Outlook for the foreign-currency long-term issuer ratings could be revised to Stable should: a significant change in geopolitical, economic and/or funding outlooks compel any annulment of present plans for the renegotiation of debt obligations due to external commercial creditors.

The ratings and/or Outlooks on Ukraine’s CCC-rated domestic debt could be downgraded if: the likelihood were to rise of restructuring of the domestic debt, such as under a scenario of the war intensifying and Ukraine’s challenging debt sustainability outlook substantively weakening, funding challenges heightening and/or banking-system fragilities escalating. Alternatively, the domestic-debt ratings and/or Outlooks could be upgraded if: i) security risk were to be significantly reduced; ii) the government’s debt-sustainability outlook were to improve; and/or iii) banking-system risks ease.

For the updated Rating Review Annex accompanying this review, click here.

The methodology applicable for the reviewed ratings and rating Outlooks (Sovereign Rating Methodology, 27 September 2023) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Dennis Shen, Senior Director

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