Ukraine Debt Ratings Cut to CCC+ by S&P

Well in some countries it never rains but it pours, as they say. Following the news that Ukraine GDP contracted at an annual rate of 20% in January, today we learn that S&P have cut Ukraine's long-term foreign currency rating to CCC+, seven levels below investment grade. Ukraine’s rating is now the lowest in Europe and at the same level as Pakistan. S&P left the outlook negative, suggesting there may be more to come.

To give us all some idea of what this means contracts to protect Ukraine’s government bonds against default now cost 59.5 percent upfront and 5 percent a year, according to CMA Datavision prices for credit-default swaps today. That means it costs $5.95 million in advance and $500,000 a year to protect $10 million of bonds for five years. The cost is higher than for any other government debt worldwide.

The extra yield investors demand to Ukrainian bonds instead of U.S. Treasuries has risen 10-fold in the past year and at about 32 percentage points is the highest of any country with dollar-denominated bonds except Ecuador, which defaulted in December, according to JPMorgan Chase & Co. EMBI+ indexes.

S&P defines an obligation rated CCC as “currently vulnerable to nonpayment, and is dependent upon favorable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.”

Fitch Ratings cut Ukraine’s ratings to B, the fifth-highest non-investment grade only two weeks ago and kept the outlook “negative,”. Moody’s said yesterday that there is a good possibility they will cut their Ukraine ratings within three months.

The hryvnia tumbled yesterday, closing at a record low against the dollar, on all the talk about credit downgrades and Eastern Europe's economic problems. The currency dropped 3.4 percent to 9.26 per dollar at 6:10 p.m. in Kiev, below the previous lowest close of 9.10 reached on 18 December last. The hyrvnia has now lost more than 50 percent against the dollar in the past six months.

Ukraine started this crisis with comparatively little state debt, but as the costs of bailouts and recession fighting have mounted the debt has surged upwards. Total state debt increased in November by 33 percent to $22.1 billion from $16.6 billion the previous month, according to recent data from the Ukraine Finance Ministry. In December, the total debt increased by a further 9 percent - up to $24.1 billion. The government initially targeted a budget deficit of 18.8 billion hryvnias ($2.34 billion) or about 2 percent of gross domestic product in 2008. It later cut the gap below 1 percent of gross domestic product, meeting an agreement with the International Monetary Fund which approved a $16.4 billion loan to Ukraine to help stabilize the economy.

Thus Ukraine’s total state debt in 2008 increased by 37 percent to $24.1 billion from $17.6 billion in 2007. It is however still at a pretty low level, being estimated by the IMF in their last standby loan report to rise to some 17.4% of GDP in 2009. The real problem are the mounting liabilities in the private sector, and how these can fall inwards onto state finances.

Update: Wages Fall Rapidly


Average Ukrainian wages fell by 16.8% in January (to UAH 1,665 per month) over the level of December, according to the State Statistics Committee yesterday. The highest average wages were paid out in Kyiv (UAH 2,794 per month), down 21.3% over the level of December 2008. We need to treat this kind of data with some caution, since obviously seasonal factors are at work, and average wages were still up (by 9.4%) over January 2008.

However inflation is still very high in Ukraine, so even with a 10% annual increase in money wages real wages are falling sharply. Inflation was up again in January rising at a 2.9 percent rate over December, which compares with a 2.1 percent rise in December over November. the country's Economy Ministry said. Year on year inflation was running at 22.3% in January.

In addition to the drop in real wages (and the rise in unemployment), there is a problem with unpaid salaries. As of Feb. 1, 2009, the volume of unpaid salaries and wages was up by 35.7% compared to January 1, with the largest volume of wage arrears being observed (rather unsurprisingly) in Donetsk region.

Current Account Surplus

On the other hand Ukraine did have a current account surplus of $500 million in January, according to provisional data released by the acting head of the National Bank, Anatoly Shapovalov yesterday (Wednesday). Shapovalov said the first current account surplus in recent years was due to a steeper decline in imports than in exports. However, the overall balance of payments continues to be in deficit since the flow of capital is neagtive, with loan repayments far exceeding the volume of new loans raised. Thus the he financial account deficit was $2.3 billion in January.

Shapovalov estimated that the balance of payments deficit as coming in at $12 billion for 2009, with the National Bank hoping to receive $9.6 billion from the International Monetary Fund in 2009, which "would be a big help," he said.

Ukraine's current account deficit widened to $11.9 billion or 6.7% of GDP in 2008 from $5.3 billion or 3.7% of GDP in 2007, according to preliminary data from the National Bank. The current account deficit grew as the visible trade deficit rose to $16 billion.

Unsurprisingly, with all this going on, bank lending is reducing, and in January, the total consumer loans were down by an annual 1.8 percent compared to a 7.7 percent rise in December 2008.

Ukraine GDP Down 20% Year on Year In January

Well, Paul Krugman certainly got it right on this one, the Great Depression may now reasonably be considered to have arrived in Ukraine. Ukraine's GDP declined 20 percent in January year-on-year, according to Valeriy Lytvytsky chief advisor to the chairman of the National Bank of Ukraine. "The decline in GDP in January was about 20 percent according to my reckoning. It's the biggest drop ever. It's a bad start," he said. According to Lytvytsky the construction and industry sectors have been the hardest hit by the economic crisis.

The Statistics Office don't produce detailed information on the month by month movements in GDP, but using the raw data they do provide I have calculated the monthly growth rates, and have produced the chart below, which gives a pretty clear idea of what has been happening.



Industrial output fell in January for the sixth month in a row, with a 16.1 percent decline between January and December 2008. This was the biggest decrease since January 1994, when there was an 18.6 percent drop. Industrial production in January was 34.1 percent down on January 2008. The year-on-year decline in construction also increased ten-fold, hitting 57.6 percent, Lytvytsky said.

"At the start of last year there was one sector in recession - construction. All the rest were in positive territory. Now only one economic sector is growing - agriculture - with growth of 0.5 percent, within the margin of error. All the other basic industries, which account for about 80 percent of GDP, are contracting."
Valeriy Lytvytsky

Unfortunately this may well be the last month for which I can do this kind of calculation and comparison, since the State Statistics Committee will not be publishing monthly GDP results (as in the past), starting this January and (ironically) as a result of the move to harmonise Ukraine methodology with international-standard, quarterly reporting. I say ironically, since in this case we will be trading short term insight for longer term precision. However, the office will continue publishing monthly results for individual economic sectors like agriculture, industry, construction and transportation, so we maywell be able to invent some kind of "proxy", just to keep an eye on what is happening in more or less real time.