Kyiv, May 30 - S&P Global Ratings lowered its foreign currency long- and short-term sovereign credit ratings on Ukraine to 'CCC+/C' from 'B-/B', the rating agency said.

At the same time, we affirmed the 'B-/B' local currency long- and short-term sovereign credit ratings on Ukraine. The outlook is negative. We also affirmed the national scale rating at 'uaBBB-'," it said.

We also revised downward our transfer and convertibility assessment to 'CCC+' from 'B-'," the agency experts said.

The rating actions reflect our expectation of a prolonged period of macroeconomic instability in the country, due to Russia's military intervention. We believe that substantial damage to Ukraine's economy and tax-generation capacity has made government debt payment more dependent on the steady flow of international financial support," the report says.

The negative outlook reflects risks to Ukraine's economy, external balances, public finances, and financial stability stemming from the military conflict, which might undermine the government's ability to meet its debt obligations," according to the document.

We could lower the ratings in the next 12 months if the government's liquidity position were to deteriorate or there were indications that the government might de-prioritize debt service against meeting general budget, defense, and reconstruction spending needs. We could also lower the ratings should we expect Russian military actions to significantly weaken the government's administrative capacity," the agency said.

We could revise the outlook to stable in case of an improvement in Ukraine's security environment and better visibility on its medium-term macroeconomic outlook," the expert said.

The first three months of Russia's military aggression have taken a severe toll on Ukraine's economy and society. About one-quarter of the country's productive capacity and most of its seaports are now located in areas occupied or blockaded by the Russian military. There is a large degree of uncertainty regarding how the conflict might develop, but at present the prospects for resolution are uncertain," they stated.

Assuming the conflict persists into the second half of 2022, we project Ukraine's real GDP will contract by 40% on the back of collapsing exports, consumption, and investment. Given substantial damage to physical and human capital, Ukraine's medium-term growth prospects are uncertain and hinge upon the extent to which the government regains a level of territorial integrity, alongside sizable reconstruction efforts," they noted.

Our latest projections put the annual fiscal deficit in 2022 at 25% of GDP compared with 3.5% before the conflict," the report says.

Short-term government financing risks seem to be contained, in light of concessional funding committed by the international community, which we estimate exceeds $35 billion as of late May," the report says.

Concessional support could cover as much as 70% of Ukraine's financing needs in the coming months (with the rest coming from domestic issuance). The high share of grants in these funds will help contain the buildup of government debt in nominal terms. However, the fiscal and funding outlooks beyond September are less certain. We expect government deficits to remain sizable in the next few years, due to substantial post-war reconstruction costs and significant disruptions to the government's tax mobilization capacity. There is also broader uncertainty over Ukraine's debt-to-GDP trajectory in light of unclear economic recovery prospects and the high sensitivity of the debt burden to exchange rate fluctuations, given that over 60% of government debt is denominated in foreign currencies," the report reads. (om/ez)