The agency said the ratings were not affected by the Ukrainian parliament's January 10 decision to dismiss the government over its recent natural gas purchase deal with Russia.
Standard & Poors credit analyst Helena Hessel said the no-confidence vote had been backed by 250 of the Rada's 450 deputies, but Prime Minister Yuriy Yekhanurov said the decision contradicted Ukraine's Constitution. President Viktor Yushchenko also challenged the decision and supported the current government that is expected to stay in power until the parliamentary elections, due in March 2006.
"Last week's final resolution increased both Ukraine's dependence upon gas from Turkmenistan and the average price it pays for its gas imports to $95 per 1,000 cubic meters from $50," Hessel said.
The agency said the higher gas prices would put pressure on Ukraine's already-high inflation and might further slow down its poor economic performance. Average inflation increased to an estimated 13.8% in 2005, up from 9% in 2004, while real GDP growth slowed to below 3% last year, down from 21.1% in 2004.
"An increase in the price Ukraine currently pays for gas would also lead to a shift to a current account deficit in 2006 from a surplus of almost $3 billion in 2005," the expert said. "Similarly, unless the price hikes are fully passed on to consumers - an unlikely event in view of upcoming parliamentary elections in March 2006 - the consolidated budget deficit, estimated at a moderate 3%-3.5% of GDP in 2005, might increase significantly despite improved tax collection efforts."
The expert said Ukraine's economic prospects were rather bleak, "especially in light of the challenges of difficult political and institutional reform and of governing a split nation, and the burdens of industrial restructuring, weak corporate governance, and a weak payment culture."
Nevertheless, Ukraine's ratings continue to be supported by relatively robust external position and low government debt levels, with pertinent ratios significantly stronger than those of BB median. According to Hessel, the stable outlook on Ukraine reflects the government's significant fiscal and external flexibility.
"A difficult political calendar of upcoming parliamentary elections, and the ongoing governmental crisis just few months after the previous government was dismissed, have delayed the legislation and implementation of considerable reform that President Yushchenko hoped to deliver, and could also lead to further economic deterioration in the coming months," Hessel said.
"The key economic challenges of containing inflation and fiscal deficits and improving growth performance in 2006, which must be addressed in the near future to ensure that Ukraine's creditworthiness will not be compromised, with require a decision and strong government at bat immediately after the elections," she concluded.
