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Monday, 18 June 07:43 (GMT -05:00)

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Why Do EU Countries' Ratings Deteriorate and Ukraine's... Improve?

Investment news, Ukraine. There is something absurd in the investment world: ratings of leading EU countries (Italy, Spain, Portugal, Ireland, Greece, Cyprus etc) deteriorate with only one country in Europe - Ukraine - whose international rating continues rising. Why? Has the country become more attractive to investors? Or reasons lie elsewhere?


Let's have a look at the argument of international rating agency, Fitch Ratings, which upgraded its forecast for Ukraine from B- to B on 21 July 2011. What transformations are under way in this nation's economy and what is in for the country's investors?


What are some positive things that Fitch Ratings found in Ukraine's investment climate?


On 21 July Fitch Ratings raised Ukraine's investment rating from 'stable' to 'positive':
1. The Agency's report. After the Agency's report is viewed closer, the situation looks as follows. Fitch announced an improved forecast for long-term issuer default rating (IDR) of Ukraine in foreign and national currency from 'stable' to 'positive'. As such, the Agency maintained long-term IRDs at B and short-term IRDs at B, too.
2. Ratings of Ukrainian businesses also improved. Fitch upgraded forecasts for DTEK, Metinvest, MHP S.A., OAO Mironovskiy Khleboprodukt and Kernel Holding from 'stable' to 'positive' as a result of an improved sovereign rating.
3. Better ratings of Ukrainian Euro-bonds have been maintained. A little time ago, in June, Fitch ranked Ukraine's Euro-bonds (totally worth $1.25 bn.) at B.
4. Fitch experts' opinion about Ukrainian economy. Nevertheless, Fitch experts noted that Ukrainian economy remains very sensitive to global economic shocks and, as a result, rather vulnerable. Despite some reservations, this is very positive news for the Ukrainian government. It can bring many disappointed investors back to the country.
5. Negative Fitch rating. Remember that the same agency, Fitch, rated Ukraine 'negative' at the peak of the global financial crisis in 2009. This brought about significant flight of capital from the country and threatened formation of a huge budget deficit. The issue of Ukraine's default on credits could easily arise. At that time the situation looked absolutely critical and it took about two years to work it out.


What does Ukraine's B+ level stand for in the international scale of credit rating from Fitch Ratings?


According to Fitch Ratings:
AAA is the highest level of solvency;
AA - a very high level of solvency;
A - a high level of solvency;
BBB - an adequate level of solvency;
BB - the level of solvency is below adequate;
B - a significantly inadequate level of solvency;
CCC - default possible;
CC - default very likely;
C - default inevitable;
D - default.
Therefore, Ukrainian investors should understand, as experts of the Masterforex-V Academy have explained, that B+ means risky investments for investors even though on this criterion Ukraine came ahead of Greece (CCC) but is below Norway, the Netherlands, Luxembourg, Germany, France, Switzerland, Denmark , Canada, the US, Austria, Sweden, Singapore, Great Britain (all rated AAA).


Why was Ukrainian rating raised?


It is absolutely obvious, according to experts of the Forex and Stock Exchange Trading Academy of Masterforex-V, that the Agency's findings were based on indicators of the country's economic development and analysis of reforms it has made:
macroeconomic figures. First of all, figures of the gross domestic product (GDP) growth. It was about 4% in Q1 2011 and 3.5-3.8% in Q2. Now Fitch forecasts a GDP growth at 4-5% in not only 2011, but also 2012;
the nation's financial stability. The Ukrainian government has managed to keep public debt within reasonably limits all this time. The exchange rate of the national currency, the Hryvna, has also remained stable and predictable. The rating agency highly appreciated effort of the National Bank of Ukraine;
adoption of a new tax code. This helped substantially reduce the deficit of the state budget. Despite expectations, the new code did not ruin small and medium businesses. Moreover, a lot of limitations on entrepreneurship introduced in the past have been abandoned for the past couple of months;
the pension reform under way. Obviously, the international rating agency, Fitch, highly appreciated how prepared the Ukrainian government is to take unpopular, but necessary measures in the social arena. Even though the draft law about the pension reform has not been signed by the Ukrainian President, technically it became effective after it was adopted by the country's parliament. Outcomes of the pension reform will be obvious in about 2-3 years from now. So, the way Fitch's assessed activities of the Ukrainian government can be regarded only as an advance;
political stabilization in the country. The past two years look like the example of political stability and, accordingly, predictability in the context of endless inter-party battles that shook Ukraine during V. Yuschenko's tenure. This surely adds to the favorable climate for investors.


What is in for the exchange rate of the Ukrainian Hryvna in the context of a positive evaluation from this international organization? Traders of the Masterforex-V Academy point out that currently the Hryvna is within a strategic range of the senior TF:
1. A short A/B down has completed:
• 7.9177 = 62% from the entire bullish 7.8725-8.0101;
• the а-в-truncated с correction model. С 7.9836-7.9177


A wave of a senior TF is forming upwards. It has already cancelled possible b(C) to the bearish movement (by breaking through the protective pivot):
• В + FZR are necessary, a w1 move up;
• continuation of a series of short waves down.


The Editor's Office of Market Leader in conjunction with experts of the Forex and Stock Exchange Trading Academy of Masterforex-V hold a survey in the traders' forum: In your opinion, an improvement in the investment fund climate in Ukraine, based on its Fitch rating, is:
• a reflection of an emerging trend of investment attractiveness of Ukraine;
• a subjective opinion of the Agency that should not be treated seriously.


You are free to discuss this article here:   forum for traders and investors


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