Ukraine’s ratings held at Ca by Moody’s with stable outlook

Investing.com -- Moody’s Ratings has confirmed the long-term issuer ratings for the Government of Ukraine’s foreign and local currency at Ca, maintaining a stable outlook. The affirmation of the ratings is driven by the ongoing challenges posed to Ukraine’s economy and public finances due to the war with Russia. Despite restructuring of the eurobond last year, the public debt burden continues to rise while liquidity pressures remain significant.

The stable outlook is based on the expectation that the Ca ratings will remain steady in the near future, given the difficult economic environment and persistent fiscal pressures amid uncertain prospects for a peaceful resolution of the Russia-Ukraine conflict.

The ceilings for Ukraine’s local and foreign currency remain at Caa3. The gap between the local currency country ceiling and the sovereign rating reflects the high geopolitical risks, policy uncertainty, and external pressures, despite some relief from external support. The foreign currency country ceiling matches the local currency country ceiling, indicating the gradual easing of restrictions on foreign exchange transactions after the initial war-triggered moratorium on most cross-border payments.

The Ca rating reflects the expectation of a loss of 35% to 65% of the affected debt instruments’ nominal value. It is expected that the war-related macroeconomic and liquidity challenges, risks to sustained international support, and the potential for further restructuring to ensure debt sustainability by the end of the IMF program in March 2027 will continue to be consistent with a Ca rating.

The Ukrainian economy is expected to decelerate further in 2025, with real GDP growth slowing to 2.5% from 2.9% in 2024, and remaining subdued in 2026 and 2027. This is based on the assumption that the war will continue for the foreseeable future. A significant economic rebound is unlikely without credible security guarantees, even if a ceasefire is agreed by the end of the year.

Despite substantial financial support from international partners, the war is expected to keep Ukraine’s public finances and external position under severe pressure. The government fiscal deficit is projected to widen to 19% in 2025 from about 17% of GDP in 2024, primarily due to defense spending. The deficit is expected to be mainly financed by external donor support, including G7 Extraordinary Revenue Acceleration (ERA) financing generated from future proceeds on frozen Russian assets. The deficit is projected to narrow to around 15% in 2026 and 10% in 2027, reflecting expenditure cuts amid constrained funding availability.

The current account deficit will remain wide as import needs far exceed export capacity. Liquidity pressures will remain high due to large financing needs, which are expected to be mainly covered through external donor support and domestic market issuances.

Despite the eurobond debt restructuring in August 2024, Ukraine’s government debt burden is rapidly rising. Debt-to-GDP increased to close to 90% of GDP at the end of 2024 from 81% at the end of 2023, and is projected to exceed 110% of GDP at the end of 2025, and gradually increase further in the medium term.

Ukraine’s ESG Credit Impact Score CIS-5 mainly reflects its elevated exposure to social risks due to the war with Russia, and a weak governance profile. The country’s exposure to environmental risk is equal to E-3 issuer profile score, driven by physical climate risks, waste and pollution, and natural capital. Its exposure to social risk is equal to S-5 issuer profile score, reflecting the challenges posed by the ongoing war and the resulting displacement of significant parts of the population. Ukraine has a very weak governance profile score (G-5 issuer profile), reflecting weaknesses in the rule of law and corruption, which weigh on the business environment, as well as a track record of sovereign defaults.

The ratings could be upgraded if the recovery for commercial creditors in the event of default is likely to be higher than what is implied by a Ca rating. This could occur in the context of a negotiated settlement leading to a normalization of economic conditions, helping to contain Ukraine’s financing needs, and reducing risks to the sustainability of Ukraine’s government debt. However, the probability of such a scenario materializing in the foreseeable future is low.

The ratings could be downgraded if the military conflict leads to an increase in liquidity and external pressures and threatens further debt sustainability. This would increase the likelihood of a new debt restructuring that could result in losses in excess of 65%. Indications that the IMF program is no longer on track could also put downward pressure on the rating. A change in Ukraine’s domestic political landscape leading to Russian influence on its institutions could lead to a lower rating as it could jeopardize the IMF program and official external support.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.