Moody's Cuts Ukraine Rating on Rising Political Crisis

Rating firm Moody's again lowered Ukraine's credit rating by a notch on Friday, citing the "escalation" of its political crisis, and put the country on a "negative" outlook for further downgrades.

Moody's Investors Service pushed the country's rating deeper into speculative territory, to "Caa3" from "Caa2" -- a one-notch move matching the rating firm's prior downgrade in January.

Three factors which underlie Ukraine's longstanding economic and fiscal fragility drove the downgrade, the rating firm said.

The first was "the escalation of Ukraine's political crisis as reflected by the recent regime change in Kiev as well as the annexation of Crimea by Russia," it said, noting that Russia, rated Baa1, is being reviewed for a downgrade.

The second was the country's strained external liquidity, given the continued decline in foreign-currency reserves and the withdrawal of Russian financial support and a rise in gas import prices.

"This assessment accounts for the near-term liquidity relief that the recently agreed IMF staff-level agreement will provide."

Ukraine's eroding fiscal strength was the third driver. Moody's predicted the debt-to-GDP ratio would rise to 60 percent by the end of 2014, up from 40.5 percent at the end of 2013, amid a significant economic contraction and a sharp currency depreciation.

"Moody's expects that domestic political risk in Ukraine will remain high given upcoming presidential elections in May, and the risk of early parliamentary elections later in the year," it said.

"Moody's also sees a significant risk of a further destabilization of eastern and southern Ukraine."

The risk of further economic sanctions by Russia also was weighing on Ukraine's credit rating.

"An escalation of economic sanctions by Russia, with increases in the gas price and potentially escalating to trade restrictions, would also be detrimental to Ukraine's economic outlook, given that Russia accounts for almost all of Ukraine's gas imports, and for around 25 percent of Ukraine's goods exports.

"Whilst it is extremely challenging to assess the probability of such an event occurring, Moody's considers it sufficiently material to be a factor in the rating."