The international rating agency Fitch Ratings has affirmed Ukraine's long-term foreign currency issuer default rating (LTFC) at "Restricted Default" (RD) pending the completion of the restructuring of obligations for which Ukraine has already suspended payments or announced a future suspension.
"Ukraine's LTFC RD will remain at 'RD' until Fitch makes a decision on the completion of the exchange and normalization of relations with a significant majority of external commercial creditors," the agency stated in a message on its website.
Fitch reminded that Ukraine is continuing the process of restructuring its external commercial debt. After the successful completion of the Eurobond exchange in September 2024, the government ordered a temporary suspension of payments on the external commercial loan from Cargill amounting to $0.7 billion starting September 3, 2024, on the Eurobonds of "Ukrenergo" with state guarantees for $825 million from November 9, 2024, and on GDP warrants from May 31, 2025.
Additionally, the agency confirmed the RD for local loans at "CCC+". "The higher long-term RD in national currency reflects Ukraine's ongoing servicing of debt in national currency as part of the current process of restructuring external commercial debt, confirming our expectations of a preferential regime for debt obligations in national currency," Fitch explained.
It noted that the debt structure of domestic government bonds (OVGZ) shows only 1.3% held by non-residents, with a predominant share held by the National Bank of Ukraine and domestic banks, mainly state-owned, which limits Ukraine's benefits from any restructuring, as it creates potential fiscal costs (including bank recapitalization) and risks for the stability of the financial sector, hindering the development of the domestic debt market.
Fitch expects that the war will continue until 2025 within the current broad parameters. "Despite some territorial successes by Russia since late 2023, military support from the West and firm resolve should allow Ukraine to avoid significant additional territorial losses," the agency believes.
It suggests that the goal stated by the new U.S. administration to end the war could lead to a negotiated ceasefire, but a peace agreement is unlikely due to the complex concessions required from both sides. The parameters of a negotiated ceasefire, including security guarantees for Ukraine and territories that will remain under Russian control, remain uncertain, Fitch added.
According to its estimates, the state budget deficit will remain high at 19.1-19.2% of GDP in 2024-2025, despite the recently approved tax increases, due to high defense spending and expected reductions in foreign grants. Significant fiscal consolidation will be limited by the continuation of the war, as well as expenses for reconstruction in the event of a prolonged ceasefire, which is likely to maintain a high dependence on foreign financing.
Fitch forecasts that Ukraine's debt will rise to 90.8% of GDP in 2024 from 84.4% in 2023, with 77% of external debt having a high degree of concessionality, and 74% denominated in U.S. dollars. The agency adds that uncertainty regarding external financing in the near future has eased, as the G7 is likely to provide around $50 billion in loans secured by income from frozen Russian sovereign assets.
Fitch also expects the current account deficit to increase to 8.4% of GDP in 2024 and to 13.6% of GDP in 2025, as constraints on production capacities (e.g., labor and energy) will hinder export growth. Increases in consumer spending, military imports, the easing of currency restrictions, and the anticipated decline in subsidies will outweigh the projected decrease in service imports from Ukrainians abroad, the agency added.
It estimates that official financing will cover the needs for external borrowing: international reserves will grow to $42 billion in 2024 from $40.5 billion in 2023.
Fitch also predicts that inflation in 2025 will average 9.3%, compared to 6.2% in 2024, as rapid wage growth amid labor shortages and skill mismatches may sustain price pressure on domestic demand.
At the same time, growth is expected to slow to 2.9% in 2025 from 4% in 2024 due to the ongoing labor and energy shortages.
"A solid and reliable ceasefire could significantly enhance growth prospects in the country in 2025-2026," the agency noted.