The signing of the association agreement between Ukraine and the European Union will be positive for Ukraine's trade over the long term, but there could be short- to medium-term negative impacts largely related to Russia's reaction, Standard & Poor's said in a press release issued on Friday.
"Russia would likely respond by imposing trade restrictions on Ukraine similar to those of August. Exports to Russia would likely fall as a result. Last year Russia accounted for 26% of Ukrainian commodities exports and 39% of services exports," S&P said. Under its base scenario, Ukraine is not expected to accomplish large-scale reforms in the coming few years, which makes an agreement on a multilateral external financing program unlikely. "Such a program would probably involve reforms including some combination of the following: fiscal consolidation, making the domestic gas market more market-oriented, accelerating the resolution of nonperforming loans in the financial sector, and increasing exchange-rate flexibility," S&P said. The agency expects the general government net debt burden to increase to 40% of GDP next year from this year's 34%. "We expect the government's local currency debt and general government deficit to continue to be financed largely by the National Bank and state-controlled banks. The central bank holds 60% of local currency debt while banks hold 32%," S&P said.