This article has appeared in Bloomberg and sheds the light on the impact of the financial crisis on Ukraine. With IT labour market cooling down the opportunities for outsourcing are on the increase. We will cover the impact of the financial crisis on the outsourcing industry in our upcoming articles.
S&P Cuts Ukraine’s Credit Rating on Economy, Banks
By Daryna Krasnolutska, Bloomberg
Oct. 24 (Bloomberg) — Standard & Poor’s lowered Ukraine’s credit ratings for the third time since June on concern over the strength of the country’s banks, its weakening currency and slowing economic growth.
Foreign-currency debt was dropped to B, five steps below investment grade, from B+, the ratings company said in a statement today. Local currency debt fell to B+ from BB-. S&P cut Ukraine’s credit ratings in June and lowered its outlook to negative from stable on Oct. 16, joining both Fitch and Moody’s, who downgraded the country’s ratings earlier this month.
“The downgrade reflects the rising cost to the Ukrainian government of a necessary recapitalization of the banking sector against a backdrop of declining growth and heightened exchange rate risk,” said S&P in the statement. “Low confidence in Ukraine’s financial and monetary institutions increases the associated risks to the real economy and inflation.”
The global financial crisis is hitting more vulnerable emerging markets as investors shun riskier assets in countries with growing current-account deficits in a flight to safety. Ukraine has the worst creditworthiness of Europe’s emerging markets, based on the cost of credit-default swaps, which protect bondholders against default. Its economy’s meltdown is complicated by a political crisis that led to collapse of the government and early elections.
Hryvnia Falls
The hryvnia fell to 6.0812 per dollar, its weakest level since the currency was introduced in 1996. Ukraine’s annual inflation rate almost tripled in a year to a record 31.1 percent in May before easing back to 24.6 percent in September.
The government is seeking a $15 billion loan from the International Monetary Fund and plans to join countries including the U.K. to Iceland, Germany and Belgium in nationalizing troubled lenders. It may buy Prominvestbank, the country’s sixth-largest lender, and other banks, Prime Minister Yulia Timoshenko said.
“A substantial IMF loan facility for Ukraine is likely to be approved relatively soon,” said S&P. “ Nevertheless, the necessary political consensus upon which IMF and other concessional lending depends may not come quickly enough to offset mounting pressures on the exchange rate and the financial sector.”
The country’s economy may face the risk of recession as prices for its main exports, including steel, dropped, as demand weekend at world’s market, according to the president’s office.
“A reversal in Ukraine’s terms of trade is also underway, adding further downward pressure on growth prospects in the lead-up to national elections,” S&P said.
The outlook for Ukraine is negative, said S&P, indicating it may cut the rating further, according to an e-mailed statement.
“Conversely, the outlook on the ratings could change to stable if the government is successful in implementing effective financial stabilization measures that lay the foundation for economic recovery over the next two years,” said S&P.
