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Concerns grew Friday over the prospects for the embattled Ukrainian economy as ratings agency Standard & Poor's downgraded its assessment of the country's creditworthiness deeper into junk status over rising external financing needs.
The downgrade is the latest blow to the government of President Viktor Yanukovych at a time of increasing economic difficulty and tense relations with giant neighbour Russia over Kiev's EU integration ambitions.
The agency lowered its long-term foreign and local currency sovereign credit ratings on Ukraine to 'B-' from 'B', with a negative outlook, it said in a statement.
"The downgrade reflects our view that the government's strategy is increasingly unlikely to secure sufficient foreign currency to meet its elevated external financing needs," S&P said.
"The ratings are constrained by our view of political uncertainty, financial sector stress, and weak external liquidity," it said, adding that Ukraine's government debt was still relatively low and the economy fairly diversified.
According to Standard & Poor's ratings definitions, a 'B' rating means that adverse conditions can impair a government's capacity to meet its financial commitments.
S&P said that foreign currency reserves held at the National Bank of Ukraine fell by 26 percent year-on-year in September 2013 and predicted that a devaluation of the Ukrainian hryvnia has become more likely.
Ukraine is hoping to sign a key association agreement with the EU at a summit in Vilnius at the end of this month that would crate a free trade zone, a move questioned by the Kremlin which has warned of trade reprisals against Kiev.
But the signing of the broad political and economic agreement risks being in doubt until the very last minute, with the EU insisting that Ukraine must release former prime minister Yulia Tymoshenko, who was jailed for seven years in 2011 on abuse of power charges.
"Signing the (EU) agreement would be positive for Ukraine's trade over the long term, but there could be short- to medium-term negative implications largely related to Russia's reaction," S&P said.
"Russia would likely respond by imposing trade restrictions on Ukraine," it added. "Exports to Russia would likely fall as a result."
Standard & Poor's said Russia accounted for 26 percent of Ukrainian commodities exports in 2012 and 39 percent of services exports.
Ukraine's economy remained in trouble in the third quarter of 2013, with GDP contracting 1.5 percent, the fifth consecutive quarter of negative year-on-year growth, the statistics office said Wednesday.
'Ukraine needs unpopular reform'
Ukrainian economists said that the outlook for the economy remained weak so long as the government refused to commit to economic reform, an unlikely prospect given looming presidential elections in 2015 where Yanukovych is expected to seek a new term.
"The current economic situation is very difficult, although not catastrophic or hopeless," said Olexander Zholud, economic expert at the International Centre for Policy Studies.
"The creation of a free trade zone with the European Union would have a positive effect in the medium term but not in the short term," he said.
S&P said it did not expect Ukraine to commit to broad-based reforms on fiscal consolidation, the gas market, exchange rate flexibility and non-performing loans.
"The economic dynamic in the country is very weak and does not allow us to expect an improvement in the economic indicators any time soon," said Vasyl Yurchyshyn, head of economic programmes at the Razumkov Centre in Kiev.
"Ukraine needs to carry out unpopular reforms," he added.