2014.08.2306:26:00UTC+00Fitch Cuts Ukraine's Ratings On Weak Economic Outlook

Fitch Ratings downgraded Ukraine's sovereign ratings by one notch as the nation is part-way through a political transition and disputes with Russia dampen economic outlook.

The rating agency on Friday lowered Ukraine's local currency rating to 'CCC' from 'B-' and affirmed foreign currency rating at 'CCC'.

Fitch said that instability in the east and disputes with Russia are affecting the economy. The economy is forecast to shrink at least 6.5 percent this year and projected zero growth in 2015 and 2016.

The agency said the conflict with separatists may persist or intensify, delaying economic revival and damaging productive assets. Polls indicate new elections in October could lead to stronger parliamentary backing for this programme, but economic and political risks could derail it.

The government aims to cut the fiscal deficit to 6 percent of GDP in 2015. Direct and guaranteed debt will surpass 65 percent of GDP in 2014 - above the level envisaged in the IMF programme, it said. According to Fitch, refinancing sovereign debt remains a challenge.

Moreover, the reserve position remains fragile and only public foreign-currency borrowing under the IMF programme stands in the way of a renewed external financing crisis and probable default.

In February, Standard & Poor's downgraded Ukraine to 'CCC' from 'CCC+'. That was followed by a similar action by Moody's Investors Service in April. Moody's downgraded Ukraine's government bond rating to Caa3 from Caa2 and kept 'negative' outlook.