Ukraine may face problems due to private sector debt, high inflation - Moody`s

Moody`s Investors Service said the Ukrainian government`s credit position has strengthened in recent years, but cautioned that problems may arise due to large foreign-currency private sector borrowings and a stubbornly high rate of inflation that challenges the central bank`s exchange rate regime, according to ShareWatch.

In its annual report on the nation, the agency said the global liquidity crunch will likely slow growth and exports while higher oil and gas prices will widen the current account deficit. "However, should the ambitious privatization program move forward, foreign direct investment would likely cover most, if not all, of the current account deficit."

udget deficits are expected to remain contained around 2-2.5 percent of GDP over the medium-term, and though government borrowing is set to increase substantially in absolute terms this year, Moody`s does not expect deterioration in key debt ratios given expected growth and fiscal revenue outcomes.

"While diminishing, economic growth rates are likely to strengthen over the medium term alongside lower rates of credit expansion and, eventually, inflation," said Moody`s vice president Jonathan Schiffer. "A key variable in assessing Ukraine`s medium-term macroeconomic developments will be the nature of the exchange rate regime and whether that regime is judged to be sustainable." Positive factors are a growing stability in the parliamentary democratic regime, more balanced macroeconomic growth, and accession to the World Trade Organization, among others, which have combined to stimulate much-needed microeconomic restructuring and energy-efficiency measures.

In fact, these factors have prompted a review of Ukraine`s ratings for upgrade. Ukraine`s key ratings include the `B1` local- and foreign-currency government bond ratings, the `B2` foreign currency bank deposit ceiling, and the `Ba3` foreign currency country ceiling.

ShareWatch, Thompson Financial