Ukraine 2014 GDP to Decline By 5%: Fitch Ratings

Credit rating agency Fitch Ratings said Ukraine's gross domestic product will decline by 5% in 2014, as the ongoing political crisis in the country continues to weigh on its economy.

Even if Ukraine's presidential election offers some support to its sovereign credit profile by reducing near-term political uncertainty, it is not likely to lessen its economic woes, Fitch said.

"Ukraine's most pressing problems include insurgency in the east, the dispute with Russia over gas payments, adhering to its IMF programme, and maintaining reserves while meeting external funding needs," the rating agency said in a statement.

"The crisis will continue to weigh on Ukraine's economy. We forecast GDP to contract by 5% this year."

Excluding the disputed Crimean region, industrial production shrank 6% year on year in April, and consumer spending is down, especially in the east, Fitch added.

The agency further expects a rise in inflation due to gas tariffs and pass-through of exchange rate depreciation. In addition, public finances are under pressure in the country.

Earlier, Ukraine's state-controlled gas company Naftogaz paid Russia's Gazprom $786m (£468.9m, €576.3m) towards the country's outstanding gas bill.

The payment is the first step toward paying off Kiev's massive gas debt, which Moscow has said will total $5.2bn by 7 June.

Russia and Ukraine became embroiled in a gas price dispute after pro-Russian Yanukovych was replaced by a pro-European interim government in Kiev. Russia almost doubled the price it charged Ukraine for gas, which Kiev refused to pay, saying it was "political."

Fitch noted that a deal to avert a supply cut-off can be reached, as this would be in both parties' interests.

"Some immediate risks have receded. The disbursement of $3.2bn by the IMF and issuance of a $1bn bond guaranteed by the US on May 16 eased immediate external liquidity concerns and covers Ukraine's scheduled $1bn Eurobond maturity next week. But external repayments remain heavy in 2014, including Naftogaz's government-guaranteed September Eurobond," the agency added.

"Political stability, sustainable growth, and moderation in fiscal and external imbalances would be credit positive and could ultimately result in an upgrade."