Fitch: Ukraine Tariff Cuts Long-Term Positive for Agribusiness

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April 17 (Reuters) - (The following statement was released by the rating agency)

The European Union's decision to cut tariffs on Ukrainian goods could, in the long-term, help Ukraine's agricultural exporters reduce their reliance on Middle Eastern and Asian markets and ease the currency mismatch between their debt and revenue, Fitch Ratings says. In the near term, however, any benefit will be limited and is overshadowed by the risk and uncertainty created by the political and economic situation in Ukraine, which caps corporate foreign-currency ratings at the country ceiling of 'CCC'.

The approval this week of favourable tariffs and quotas is a step towards the signing of the Deep and Comprehensive Free Trade Area, which would support long-term growth of Ukrainian exports to EU. Almost all Fitch-rated Ukrainian agricultural companies (MHP, Ukrlandfarming, Mriya, Avangard (MCX: AVAN.ME - news) , Kernel, Creative) have substantial export sales. But most of them are focused on exports to Middle East, Asia and CIS (Taiwan OTC: 5864.TWO - news) countries.

We believe these companies see the European Union as an attractive market for further export growth and diversification, but we do not expect a significant immediate impact on volumes, especially as the EU is largely self-sufficient in wheat. Greater opportunities may arise in corn, or barley, or in southern/eastern European countries that are easier to service from Ukraine. Some companies that export products on which tariffs will be cut to zero (for example sunflower oil exporters Kernel and Creative) are likely to see their revenues and operating margin benefit if they maintain their prices. This could materialise in 2014.

Increasing export revenues should reduce the existing foreign-currency mismatch as long as companies are able to direct an increased portion of grain to the export markets once domestic needs have been satisfied. Most Ukrainian agricultural companies have a substantial part of their debt denominated in hard currency, while a large portion of sales are conducted through wholesalers and traders at "dollarized" but distorted domestic prices. This mismatch is one of the major risks for the sector.

Significantly lower cost of production along with high soil productivity could make Ukrainian cereals more competitive than produce from other regions. Therefore longer term Ukrainian agriculture firms could see further opportunities for exports growth.

Temporary tariff cuts are expected to take effect before the end of April following their adoption by the EU's Foreign Affairs Council this week. They will apply until November, by which time the EU hopes free trade elements of the Association Agreement with Ukraine will have been signed and come into force.