Ukraine's economy may rebound "relatively quickly" next year after a sharp contraction in 2009, helped by exports, according to Frank Gill, Standard & Poor's primary credit analyst.

Ukraine's economy may expand 4.5% in 2010, compared with the 12% contraction expected this year, he said in a phone interview with the Bloomberg news agency from London.

"We see the potential for a relatively quick rebound next year, Gill said, adding that "the outlook remains highly uncertain, as it hinges on external demand for metals, as well as metals prices."

"Ukraine is facing shocks that would damage any economy. Prices for chemicals and steel have declined sharply, while import prices are being pushed higher by rising natural gas tariffs and the exchange rate depreciation. At the same time, the ongoing political uncertainty is very unhelpful," the analyst said.

S&P cut Ukraine's credit rating to CCC+, seven levels below investment grade and the lowest grade in Europe, on February 25, saying political turmoil poses risks to crediting. S&P left the outlook negative, indicating a possible further cut. Ukraine has been forced to turn to the International Monetary Fund help to avoid a default, stabilize the banking system, and aid its currency. The Washington-based lender approved a $16.4 billion loan and gave an emergency handout of $4.5 billion in November. The government's plans to run a state budget deficit of 5% of gross domestic product have jeopardized the second installment, which was expected on February 15.

"It is not clear how strong the commitment of the Ukrainian authorities is to implement the IMF program. Government debt is quite low, though rising significantly, but the willingness to pay the debt is not clear ahead of the presidential elections," Gill said.

S&P expects the hryvnia's rate to weaken further, Gill said. Ukraine's national currency has lost more than 40 percent against the dollar in the last six months.

"The hryvnia depreciation will further drive the deterioration of the banks' asset quality, and that is ultimately going to raise sovereign debt levels, as the government will need to recapitalize local banks," he said.

Further "exchange rate depreciation raises the risk of bank and corporate defaults and rescheduling," said Gill. Still, "in the long-term perspective, it will help the economy to be more competitive as balance sheets are freed up again," he said.

S&P expects Ukraine's current-account deficit to shrink to 2% of gross domestic product by the end of 2009, compared with 6.7% last year, said Gill.


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