Oct. 14 (Bloomberg) -- Ukraine’s International Monetary Fund program is at “serious risk” of veering off track ahead of the country’s next review in November, Fitch Ratings said.

The risk has increased after “policy discipline has eroded even further, risking a delay in disbursement of the next IMF loan tranche,” Andrew Colquhoun, director of Fitch’s Sovereigns Group, said in a statement today.

Ukraine is relying on a $16.4 billion loan from the IMF to stay afloat after the credit crisis undermined demand for its raw materials including steel exports and left its financial sector stumbling. The country has received $10.6 billion in loan payments to date loan and is trying to draw a $3.8 billion tranche. The economy of the former Soviet state contracted an annual 17.8 percent in the second quarter, after shrinking 20.3 percent in the previous period.

Fitch affirmed Ukraine’s Long-term foreign and local currency Issue Default Ratings at B, five notches below investment grade, with a negative outlook.

The government of Prime Minister Yulia Timoshenko “abandoned” commitments made at the second review of the country’s program with IMF, including a failure to increase prices for natural gas paid by households and utilities, Fitch said.

Gas Pipeline

Timoshenko said last week there will be no increase in gas rates this year. State-run energy company NAK Naftogaz Ukrainy, which operates a pipeline network that transports Russian gas to Europe, will post a $33 billion hryvnia ($4 billion) budget deficit this year, President Viktor Yushchenko said on Oct. 1.

The government used part of the IMF funds to help narrow this year’s budget deficit, which the lender estimates at 8.6 percent of gross domestic product, excluding bank restructuring costs. Fitch forecasts the 2009 budget deficit at 8.5 percent of GDP, or 11.1 percent including deficit of Naftogaz.

The government’s swelling budget shortfall may further weaken the hryvnia and stoke inflation, already the fastest in Europe, President Viktor Yushchenko said on Sept. 18. The budget gap will be 100 billion hryvnia this year and 155 billion hryvnia in 2010, or 12 percent of gross domestic product, according to Yushchenko.

A delay in payment of the next IMF tranche may hamper the central bank’s ability to support the currency, the hryvnia, and undermine “fragile confidence” in the currency, Fitch said.

The hryvnia lost 38 percent against the dollar in the past year, making it the worst performer of the 176 currencies tracked by Bloomberg in the period. Inflation in September slowed to 15 percent from 15.3 percent in the previous month and 26.2 percent in September 2008.

The IMF and Ukraine’s cooperation was stalled earlier this year for three months while the government struggled to reach an agreement to cut the budget deficit.

To contact the reporter on this story: Tasneem Brogger in London at tbrogger@bloomberg.netKateryna Choursina in Kiev at kchoursina@bloomberg.net

Last Updated: October 14, 2009 12:42 EDT