ACRA has upgraded the credit rating of the Moscow Region (hereinafter, the Region) based on economic growth rates that outpace the national averages. This translates to the stable growth of the Region’s budget, making it possible to change its structure in favor of flexible capital expenses. Stable budget indicators, moderate debt load, minimal refinancing risks, and a substantial amount of liquidity support the credit rating.
The Moscow Region is a large, industrially developed region characterized by its significant contribution to Russia’s economy (RUB 3.8 tln in 2017, or 5% of Russia’s total GRP). The Region ranks second in the country by population (5% of the total).
Key rating assessment factors
The Region finances its large-scale capital investment program independently. Growth in the Region’s tax and non-tax revenues (TNTR) amounted to 70% for 2013-2018, which significantly exceeds the national average of 57%. ACRA expects annual TNTR growth to remain at 10% in 2019-2020. The Region’s budget is characterized by a consistently high share of internal revenues. TNTR should average 93% of budget revenues, excluding subventions, for 2016-2020. According to ACRA, mandatory expenses for this period could average about 73% of total expenses, while the average share of capital expenses is estimated at 18%. Stable revenue growth allows the Region to maintain a significant level of capital expenses, as well as increase them. The planned growth of capital expenses is 90% in 2019 and 70% in 2020 compared to 2018. As a result, the Region predicts that the budget deficit could exceed 20% of TNTR in 2019 and about 10% in 2020, while in 2018 this figure was 6%. In this case, the change in the structure of budget expenses would fully compensate for the potential increase in debt load. In addition, the Region plans to finance part of its deficit with accumulated liquidity. It should be noted that in recent years, the Region has not managed to fully execute its planned capital investment program or its planned deficit.
The Region’s debt load is average and risks of refinancing are minimal. ACRA estimates that in 2019-2020, the Region will finance two-thirds of its budget deficit with borrowed funds and the remainder with account balances. If the Region fully executes its planned investment program, its debt could increase from the 2018 figure of 28% TNTR to 41% TNTR in 2020. The debt to operating balance ratio should equal 1.6x at the end of 2020, indicating an average debt load. The Region was able to reduce debt-refinancing risks in 2020-2021 by placing bonds in October 2019 and using raised funds to make early repayments on some bank loans. At the date of this analysis, the Region's debt due in 2020 amounted to 29% of total obligations and was 3.5x less than the expected operating balance, excluding interest expenses, indicating a minimal refinancing risk in 2019. Debt servicing costs in 2019-2020 should not exceed 11% of the operating balance, indicating a low level of risk and that these costs are not burdensome for the Region’s budget. Interest revenues from liquidity management operations for the last three years cover at least two-thirds of the Region’s interest expenses. The debt load of public sector enterprises remains at a moderate level.
The Region has substantial amounts of budget liquidity. The Region regularly places funds in amounts that allow it to cover costs for one to two months. As of October 1, 2019, the Region’s account balances amounted to about 78% of its debt obligations. Internal liquidity could decrease if the Region fully executes its capital investment program in 2019, as a significant part of deposited funds would be used to cover the budget deficit.
The Region enjoys a high level of economic diversification and a favorable geographic location. Despite the historically high concentration of engineering enterprises in the Region, the dominant industry is the food industry (about 25% of industrial production), which is not related to procyclic industries. The Regional budget’s tax revenues do not depend on one large taxpayer or group of large taxpayers. Historically, the maximum share of a single taxpayer in the budget’s tax revenues is less than 4%. The proximity to Moscow guarantees a stable market for products manufactured in the Region and demand for labor resources, which ensures a low unemployment rate (about 60% of the national average in 2015-2018) and a relatively high level of per capita income (30% higher than the national average during the analyzed period). The Region’s GRP in nominal terms increased by 39% in 2015-2017, while the total GRP for the rest of Russia increased 27%. The growth rates of industrial production in the Region in 2016-2019 is significantly ahead of the national average (at least 10% per year, while the national average is 2-3%).
- Executing planned indicators on capital expenses in 2019-2020;
- Maintaining substantial levels of budget liquidity;
- Maintaining a debt strategy that does not entail growth in the budget’s debt load above 35% TNTR.
Potential outlook or rating change factors
The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- Stabilizing the expected debt load at a level below 30% TNTR;
- Future economic growth allowing the Region to increase its per capita GRP.
A negative rating action may be prompted by:
- Growth in mandatory expenses without a corresponding increase in revenues;
- Increased debt load above 50% of current revenues;
- Significant reduction in the average maturity of market debt.
The Moscow Region, 35010 (ISIN RU000A0JX0B9), maturity date: November 21, 2023, issue volume: RUB 25 bln — AA+(RU).
The Moscow Region, 34011 (ISIN RU000A0ZYML3), maturity date: December 22, 2022, issue volume: RUB 25 bln — AA+(RU).
The Moscow Region, 34012 (ISIN RU000A100XP4), maturity date: October 8, 2024, issue volume: RUB 25 bln — AA+(RU).
Rationale. In ACRA’s opinion, the bonds listed above are senior unsecured debt instruments, the credit ratings of which correspond to the credit rating of the Moscow Region.
The credit ratings of the Moscow Region and the bonds (RU000A0JX0B9, RU000A0ZYML3, RU000A100XP4) issued by the Moscow Region have been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities. In the course of assigning a credit rating to the bond issues above, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation has also been used.
The credit ratings assigned to the Moscow Region and the bonds (RU000A0JX0B9, RU000A0ZYML3, RU000A100XP4) issued by the Moscow Region were published by ACRA for the first time on December 12, 2016, December 12, 2016, December 21, 2017, and October 9, 2019, respectively. The credit rating of the Moscow Region and its outlook and the credit ratings of the bonds (RU000A0JX0B9, RU000A0ZYML3, RU000A100XP4) issued by the Moscow Region are expected to be revised within 182 days following the publication date of this press release as per the Calendar of planned sovereign credit rating revisions and publications.
The above credit ratings are based on the data provided by the Moscow Region, information from publicly available sources (the Ministry of Finance, the Federal State Statistics Service, and the Federal Tax Service), as well as ACRA’s own databases. The credit ratings are solicited, and the Government of the Moscow Region participated in their assignment.
No material discrepancies between the provided data and the data officially disclosed by the Moscow Region in its financial report have been discovered.
ACRA provided no additional services to the Government of the Moscow Region. No conflicts of interest were discovered in the course of credit rating assignment.