The better a state’s reputation, the cheaper the loans

On December 12 the government received some of the world’s top rating agency executives including Moody’s Investors Service Ltd. Vice President Jonathan Schiffer, Senior Vice President Michael Korwin, and Moody’s KMV Senior Vice President Alistair Graham, in an apparent attempt to achieve — by way of formal talks and informal chats — an increased sovereign rating of Ukraine.

These analysts pointed out that Ukraine’s current ratings reflect its economic growth caused, above all, by the government’s fiscal policy, controlled inflation, and brisk economic activity. They also believe that political differences in the parliament and between the latter and the president could not hamper the tax reform which provided economic stimuli for the future. Ukraine is carrying out radical structural reforms in the agrarian sector as well as in the field of pensions. According to Moody’s experts, Ukraine is still to fulfill such priority tasks as reforming the energy sector, speeding up privatization, and continuing its tax reform.

Now let us see what place Ukraine occupies in the Moody’s ratings made public in December 2002. In terms of banking finances, this country has a rating of E+, with only Pakistan, Indonesia, Argentina, and Uruguay trailing behind. As to long-term unsecured and maximum deposits, we stand between Caa1 and B2, taking the sixth and tenth places respectively at the end of a long list of countries. We are likely to make some headway this year.

This meant that our minister were to be utterly frank and at the same time insistent in dealing with the guests. It is precisely in this way that Vice Premier Mykola Azarov behaved earlier that day at the international conference, Risk: Management and Credit Ratings in Ukraine. The point is that Ukraine has increased this year’s plan of foreign borrowings by almost a billion euros. Clearly, the higher the Ukrainian sovereign rating is, the less international loans will cost this country. In the heat of the budget debates Mr. Azarov had insisted that Ukraine had an extremely favorable foreign borrowings situation. Now he said that Ukraine’s current rating was underrated and not conducive to investment, thus making it clear that he does not agree to this assessment because it does not take into account the real situation in this country. In his words, few countries look as good today as Ukraine does against the backdrop of a sweeping worldwide recession. “There are no economic risks at the moment which could justify such a low rating ,” Mr. Azarov continued. He reminded the audience that Ukraine has been paying its foreign debts on time, had a positive balance of payments and an acceptable; foreign debt/GDP ratio.

He also said that Ukraine intended to maintain the current high economic development rate in the next year also as well as to secure still more foreign investment, which had reached almost a billion dollars over the past ten months, with a net increment of over $740 million. “It is necessary that investors have a very clear picture of the profitability of their investments in the Ukrainian economy,” the vice premier advised Moody’s top managers. This reminds us that Mr. Azarov once emphasized that the time and size of borrowings would depend on the market situation. “We will be entering markets just the way we have been doing this year: if, when, and to the extent that benefits us. If it is not worthwhile, we will not enter the markets at all and will find an opportunity to solve problems on our own. The current economic development enables us to say so,” Vice Premier Azarov said at the time. Now he again follows the same line. He is convinced that if the government of Ukraine tapped foreign borrowing markets now, it would manage to place less profitable eurobonds than it did last May. In addition, there will be fresh negotiations with the International Monetary Fund, which became possible, as he said before, thanks to the passage of the budget. Experts note that these talks can also help Ukraine obtain cheaper loans. For this reason it would be very much to the point to have our international ratings raised.

Moody’s experts have no fundamental objections to this. All they are apparently worried about is political risk. But Mr. Azarov thinks quite the opposite. He assured the rating agency experts on December 12 that the coming to power of a government that would pursue an unbalanced fiscal policy or renege on foreign debt payments was absolutely out of the question under any circumstances.