In its new report, Fitch says that Russia's provision of external financing and cheaper gas supplies to Ukraine significantly lessens the risk of a sovereign external liquidity crisis in 2014. At the same time, it also permits Ukraine to continue to run unsustainable fiscal and external deficits, building up public and external debt, and creates a hump in debt repayments in 2016. The agency notes that Ukraine received the first USD 3bn tranche of a promised USD 15bn in Russian financing on December 24 2013 and plans to place a further USD 12bn in Eurobonds by end-2014. The schedule and amount of borrowing is still being discussed. If realized, this would be more than sufficient to refinance USD 6.7bn in sovereign external debt repayments in 2014, although the government will still need to borrow elsewhere to finance a widening fiscal deficit of up to 7% of GDP. According to Fitch, Ukraine's external financing position remains fragile. The current account deficit (CAD) widened to around 8.6% of GDP in 2013. Lower gas prices could be worth 2% of GDP to the current account, and will reduce the import bill, however, Fitch forecasts looser fiscal policy to offset some of these gains, keeping the CAD at 7% of GDP. Although reserves will grow in 2014, on the assumption that all planned Russian financing is disbursed, reserve coverage will remain well below three months of imports, the agency notes. Fitch points to high probability of maintaining the current hryvnia rate before the presidential elections of 2015. The agency expects the exchange rate at 8.3 UAH/USD until the first half of 2015. The government could theoretically take advantage of the reduced external pressure to set a floating exchange rate for hryvnia, but it is unlikely before the elections, the agency noted. Hryvnia rate was down 0.75% at the Interbank in early 2014 from 8.2730 UAH/USD to 8.3350 UAH/USD. The adopted national budget for 2014 provides for a GDP deficit at 4.3%, or 1.6pps up compared with the previous year. However, Fitch stresses the budget deficit exceeded 6% of GDP in 2013 and tends to grow in 2014 at the national level and in view of Naftogaz of Ukraine losses.
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