(adds analyst comment, trade deficit, prices)
By Umesh Desai and Peter Apps
HONG KONG/LONDON, Feb 16 (Reuters) - Ratings agency Standard & Poor's warned Ukraine on Monday it could face another ratings cut, saying it doubted the embattled country's ability to implement a crucial International Monetary Fund deal.
Fellow ratings agency Fitch downgraded Ukraine last week on similar worries, and investors have fled the country with its debt insurance in the credit default swap market increasingly difficult to trade and close to pricing in sovereign default.
S&P said it could cut Ukraine's B foreign currency rating and B-plus local currency rating by one or more notches. Fitch cut Ukraine to B from B+.
"Ukraine's political commitment to implementing the IMF loan's conditions, including structural fiscal tightening and banking-system consolidation, is wavering against a backdrop of sharply contracting growth, weakened terms of trade, and approaching presidential elections," S&P said in a statement.
Slumping steel and chemical prices, a banking correction and rising default on foreign currency loans coupled with an ongoing political crisis that last week saw the resignation of the finance minister are seen pushing Ukraine further into crisis.
Data on Monday showed more bad news, with Ukraine's trade deficit nearly doubling to $13.5 billion from $7.3 billion the previous year.
An IMF mission failed to sign off on a first review of Ukraine's performances under a $16.4 billion IMF programme during a recent visit, sparking fears of non-implementation. Ukraine says it may approach other countries including Russia for additional financial help.
Last week, the fund said talks with Ukraine were focused on containing the budget deficit in 2009 and stressed that strong crisis management was essential to stabilising the economy.
S&P said it was awaiting the government's clarification on the IMF programme before deciding on the rating and warned the economy faced growing refinancing risks.
It said that as of end-January, Ukraine's external reserves covered just over 100 percent of this year's banking sector repayments, leaving nothing for corporate obligations, estimated at $9.5 billion. The figure excludes trade financing.
"HOSTAGE TO POLITICS"
The agency said that about half of the 80 percent of GDP stock of domestic credit was foreign currency-denominated.
It warned it expected the hrvynia currency to keep depreciating, further threatening corporate and household balance sheets. The currency has halved in value since September and has lost 4 percent against the dollar this year.
Some foreign investors say they are no longer willing to trade the currency, and Ukrainian credit default swaps have also become increasingly illiquid, with no trade reported on Monday.
Ukrainian CDS is routinely quoted above 3000 basis points, the highest in the region by far and meaning it would cost more than $3 million a year to cover $10 million of five-year debt.
"I don't see any dynamics at present that would tighten these," said Citigroup Ukraine economist Ali Al-Eyd. "You have negative news regarding the IMF, negative news regarding the finance minister and you have more political uncertainty."
Ukraine's Finance Minister Viktor Pynzenyk resigned last Thursday, saying he had become a "hostage to politics".
Pynzenyk cited differences over a deficit contained in the budget backed by Prime Minister Yulia Tymoshenko, defying the IMF which had made a deficit-free budget a condition.
"For the country in the short term to get its act together, Ukraine must unite on the political front -- which they have not managed to do over the last seven years when the times were good," said Barings Asset Management investment manager Matthias Siller.
"Now the times are much worse. Without... the alignment of interests in the political sphere, Ukraine's chances to reorganise its finances are not very good." (additional reporting by Martina Fuchs; editing by Andy Bruce)