OREANDA-NEWS. Fitch Ratings has affirmed the City of Kyiv's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'CC' and its National Long-term rating at 'BB(ukr)'. The agency has also affirmed the city's Short-term foreign currency IDR at 'C'. The Outlook on the National Long-term rating is Negative. Kyiv's outstanding senior unsecured eurobonds have been affirmed at 'CC', while its domestic bonds have been affirmed at 'CC' and 'BB(ukr)'.

KEY RATING DRIVERS
The affirmation reflects Kyiv's material refinancing risk, increased exposure to forex risk, weak national macro-economic situation, and low propensity of the timely state support amid the weakened institutional framework in Ukraine. The ratings also factor in the stabilised fiscal performance with sound operating surpluses and posted surplus before debt variation in 2014.

Fitch considers Kyiv's exposure to immediate refinancing risk is material. The domestic capital markets remain weak, and the cost of borrowing has materially increased in Ukraine, while the peak of the city's repayments will be in 2H15. The city will face refinancing of its outstanding USD250m (UAH5.6bn) eurobonds in November 2015 and domestic bonds of UAH5.2bn coming due in October and December 2015.

The city's unhedged position in Eurobonds bears significant forex risk, materially exacerbated by the depreciating local currency in 2014-2015. The hryvnia fell almost 50% against the US dollar in 2014, and a further depreciation by about 60% has occurred in January-March 2015.

Fitch notes that Ukraine's ability to support Kyiv is low, considering the weak state of sovereign public finance, which significantly limits the national government's financial flexibility.

According to Fitch's estimates Ukraine's real GDP fell 7.5% in 2014, while a further contraction of 5% in 2015 is forecasted. This negative macro trend will be partially mitigated by the city's dominant status as a country's capital and its well-diversified economy. The administration expects continued contraction of gross regional product by about 3% yoy in 2015 and sluggish growth of 1.0%-1.5% in 2016-2017

Kyiv's fiscal performance improved with the operating surplus reaching 21% in 2014 (2013: 16%). Current transfers received from the central government increased by 2.5x compared with the previous year aided by performance improvement. The city posted a 2% surplus before debt variation in 2014 after running a deficit in 2010-2013.

Nevertheless the city's budgetary performance remains volatile due to the lower predictability of potential fiscal changes in Ukraine in response to the recent receipt of the first tranche of the IMF EFF programme in March 2015.

RATING SENSITIVITIES
A sovereign downgrade or any adverse change leading to the partial or full containment of the city's ability and/or willingness to service its debt would lead to a downgrade.

Positive rating action is unlikely in the current scenario. However, a sovereign upgrade along with sustainable restoration of the city's financial flexibility leading to withdrawal of material downside credit risks would lead to an upgrade.