ISTANBUL

Fitch Ratings said Wednesday that it downgraded Ukraine's long-term foreign currency issuer default rating to ‘C’ from ‘CC.’

The rating agency said the move reflects its view that "the agreement in principle reached on 22 July between the government and some Eurobond holders on restructuring terms, after parliament approved legislation last week allowing the government to suspend commercial external debt payments for three months, marks the start of a default-like process."

Fitch noted that the Ukrainian parliament's approved legislation on July 18 allows the government to temporarily suspend payments on state and state-guaranteed external commercial debt.

The agency said it expects the country will not service its external commercial debt, including a 2026 Eurobond coupon due on Aug. 1, until a restructuring agreement with bondholders is completed.

It added that the deal with bondholders and the law on debt suspension are consistent with the government's efforts to comply with its four-year $15.6 billion Extended Fund Facility IMF program, which Ukraine completed in late June in its fourth review.

Fitch said it forecasts the general government deficit to remain high at 17.1% of GDP this year, noting defense spending was 31.3% of GDP last year.

The agency projects government debt to increase to 92.5% of GDP in 2024.

"Fitch anticipates the war will continue throughout 2024 and into 2025 within its current broad parameters," said the statement. "While it is not clear either side could win a decisive advantage, there is also no sign of a willingness to make concessions, so the war could prove very protracted."

"Over a longer horizon, we anticipate some form of settlement, but view a 'frozen conflict' as more likely than a sustainable peace deal, at least for a significant period," it added.