05.12.2012 19:34
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Ukraine, Government of -- Moody's downgrades Ukraine's government bond rating to B3 from B2; maintains negative outlook

Frankfurt am Main, December 05, 2012 -- Moody's Investors Service has today downgraded Ukraine's government bond rating by one notch to B3 from B2. The outlook remains negative.

Moody's decision to downgrade Ukraine's rating and to maintain the negative outlook reflects the following key interrelated factors:

1.) A downward revision of Moody's assessment of Ukraine's institutional strength;

2.) A shortage of external liquidity, which has increased the risk of a currency and wider financial and economic crisis;

3.) Ukraine's comparatively weak economic outlook.

Moody's has also downgraded the rating of the Ukrainian State Enterprise "Financing of Infrastructural Projects" to B3 from B2, in line with the sovereign action. The enterprise's debt is fully and unconditionally guaranteed by the government of Ukraine.

For additional information on Sovereign ratings, please refer to the webpage containing Moody's related announcements http://www.moodys.com/eusovereign.

RATINGS RATIONALE

RATIONALE FOR THE DOWNGRADE

The primary driver underlying Moody's one-notch downgrade of Ukraine's government bond ratings is the rating agency's assessment of a deterioration in the country's institutional strength, against the backdrop of poor policy predictability as well as reduced data transparency. In terms of Moody's sovereign rating methodology, this is reflected in a changing in the second rating factor "Institutional Strength" to "very low" from "low to very low". Poor policy predictability mainly refers to Ukraine's weak track record in carrying out reforms stipulated in the current as well as past IMF programmes, the inability to negotiate a new gas import price with Russia for well over 12 months as well as recent (and past) ad-hoc administrative measures, in particular on the foreign-exchange market. Data transparency in Ukraine was already low, but has worsened more recently in terms of upcoming external debt redemptions for the economy as a whole, on which the central bank stopped publishing quarterly updates in January 2012. This lack of transparency is a particular concern against the background of the country's precarious external liquidity position.

Our concern about the external liquidity situation is the second driver of today's decision. The country's foreign-exchange reserves fell by 23% year-on-year to around USD24.8 billion at the end of October 2012, which implies an import coverage of just three months. The decline is due to central bank interventions on the foreign-exchange market in order to stabilise the currency against the background of a deteriorating current account, increased external debt service requirments and increased demand for foreign currency by its domestic population. Notably, the decline occurred despite the fact that the sovereign was able to tap external markets several times in 2012. It is highly uncertain if market access remains available in 2013 when sovereign external debt redemptions and service rise to USD8.9 billion (including repayments of USD3.5 billion to the IMF by the central bank) from USD7.5billion in 2012. Those are large sums compared with the government's cash balance, which comprises deposits at the central bank as well as commercial banks of around USD1.8 billion at the end of October. Domestic market access is also impeded as indicated by the wide yield spread between the primary and secondary government bond market.

The third rating driver of Moody's downgrade of Ukraine's sovereign rating is the country's comparatively weak economic outlook over the short and medium term. As a relatively open economy, the deterioration of the global economic environment has affected Ukraine's GDP growth, which turned negative in Q3 2012. Overall, Moody's expects real GDP growth to slow to 0.5% in 2012 from 5.2% in 2011. The rating agency forecasts only a modest growth recovery to 1.5% in 2013, in part due to constrained credit growth related to the exchange-rate policy of the central bank. In the medium term, growth prospects are clouded by the slow resolution of the euro area sovereign debt crisis, fiscal risks in the US and slower growth in China, all of which affect commodity prices and demand. Unlike a year ago, Moody's now views 4% GDP growth in the coming five years as unlikely and instead expects GDP growth of 2%-3% on average, which also has negative consequences for Ukraine's fiscal metrics. Moreover, this scenario assumes the successful implementation of a new IMF programme.

RATIONALE FOR CONTINUED NEGATIVE OUTLOOK

The ongoing negative outlook reflects downside risks to Moody's central scenario, which importantly assumes a new agreement with the IMF in the coming months.

WHAT COULD MOVE THE RATING UP/DOWN

The ratings could be downgraded if Moody's concerns over Ukraine's external liquidity position are heightened, in particular if the recently announced negotiations on a new IMF programme are not successful or if a new programme were again to move off-track. Downward ratings pressure could also emerge following a further deterioration in Ukraine's balance-of-payments situation, continued capital outflows, sustained liquidity shortages in the banking system, serious asset quality or financing problems, or a deterioration in public debt metrics. Moreover, any regulatory interventions by the central bank to impose long-term capital controls and/or undermine bond or deposit contracts would also contribute to downward ratings pressure.

Ukraine's rating outlook could be changed to stable if Ukraine successfully carries out reforms as stipulated in a new IMF programme over an extended period of time. The rating could be upgraded upon successful completion of a new IMF programme. In general, an upgrade would depend on a credible, more coherent and consistent approach to economic policy, particularly if this were successful in reducing the country's large fiscal and external vulnerabilities, as well as the ambiguity concerning monetary and exchange-rate policy.

COUNTRY CEILINGS

Moody's has also changed the local-currency country risk ceilings to B2 from Ba1. This is the maximum credit rating achievable in local currency for a debt issuer domiciled in the country. The rating agency has also changed Ukraine's foreign-currency bond country ceiling to B3 from B1 and its country ceiling for foreign-currency bank deposits to Caa1 from B3. These ceilings are lower than the local-currency ceiling as they also capture foreign-currency transfer and convertibility risks.

The principal methodology used in these ratings was Sovereign Bond Ratings Methodology published in September 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare each of the ratings are the following: parties involved in the ratings, parties not involved in the ratings, and public information.

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entities or their related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Thorsten NestmannAsst Vice President - Analyst Sovereign Risk Group Moody'sDeutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Bart Oosterveld MD - Sovereign Risk Sovereign Risk Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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MIS, a wholly-owned credit rating agency subsidiary of Moody's Corporation ("MCO"), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have, prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS's ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading "Shareholder Relations -- Corporate Governance -- Director and Shareholder Affiliation Policy."

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