The credit rating assigned to the Moscow Region (hereinafter – the Region) is determined by the high level of its economic development, stable budget indicators, and a well-balanced debt load, coupled with moderate risks of the broader public sector enterprises and plannable intra-year growth of debt financing and debt settlement turnover.
The Moscow Region is a large, industrially well-developed region characterized by its significant contribution to Russia’s economy (RUB 3.2 trillion in 2015, or 5% or the total RF gross regional product, GRP). The Region ranks second in the country by population (5% of total).
Key rating assessment factors
High economic diversification. Despite the historically high concentration of machine-building enterprises, the Region’s dominating industry is food processing (roughly 25% of total production output) which does not belong to the procyclical category. Tax proceeds in the Region’s budget are not dependent on one large taxpayer (one large taxpayer group): as of end-2016, the largest share of one taxpayer made up only 3.4% of the budget’s total tax proceeds.
Geographical advantage. Proximity to Moscow guarantees a stable selling market for goods manufactured in the Region and a stable demand for workforce, which ensures a low unemployment level (58% of the country average) and a relatively high level of per capita income (30% higher than the country average).
Stable budget performance. The Region’s budget is characterized by a persistently large share of own revenues (91% of budget revenues net of subventions). The growth of tax proceeds will be correlated with the economic growth rate, since the potential for extensive growth at the expense of upping local tax rates has been fully exhausted. The operating balance is under pressure from the substantially large volume of mandatory expenses (approximately 75% of total expenses); the cost saving buffer is fairly thin (by ACRA’s estimates, it amounts to 2–3% of the Region’s total expenses) due to a large share of capital expenses being channeled into socially important industries.
Moderate debt load level coupled with a well-balanced debt structure. As of the date of performing the analysis, the Region’s long-term debt made up 86% of its total debt. Every year, the Region’s debt to operating balance ratio exceeds 1.0. By ACRA’s estimates, as of end-2017, the abovementioned ratio may amount to 0.7 (vs 1.8 at end-2016). However, even if budget indicators significantly deteriorate (own revenues show an annual 7% decrease of the target level), which is anticipated in ACRA’s stress scenario, the Region’s debt to operating balance ratio will stay in the positive zone.
Substantial volume of liabilities incurred by public sector enterprises. ACRA estimates that the fiscal and commercial indebtedness of enterprises owned by the Moscow Region, which can be repaid from the regional budget amounted to RUB 6.6 bln at year-end 2016 (7% of outstanding plain debt).
Excessive budget liquidity. The Moscow Region regularly places funds on deposits and has no past due loan debt. That said, its own liquidity volume will decrease given the need of deficit financing.
Key assumptions
- Maintaining close-to-country-average economic growth rate;
- Maintaining the share of mandatory expenses at up to 80% of total budget spending during the forecast period;
- Possibility of settling a portion of public sector enterprises debt from the regional budget;
- Maintaining the current debt portfolio maturity structure;
- Conservative debt management approach that accounts for the market environment;
- Partial non-fulfillment of the Region’s capital expenditure plan.
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:
- Improvement of public sector enterprises’ financial standings;
- Notably exceeding the country-average economic growth rate.
A negative rating action may be prompted by:
- Growth of mandatory expenses;
- Increased cost of short-term funding coupled with significant turnover throughout a year.
Issue ratings
ACRA assigns AA(RU) to:
The Moscow Region, 35010 (ISIN RU000A0JX0B9); maturity date 21.11.2023; RUB 25 bln.
Rationale. The Agency believes that bond issued by the Moscow Region has a status of senior unsecured debt. Credit rating of this debt instrument corresponds to the credit rating of the Moscow Region.
Regulatory disclosure
The credit rating has 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.
The affirmed credit rating of the Moscow Region and its outlook are expected to be revised within 182 days following the rating action date (June 8, 2017).
The credit rating assigned to the bond issued by the Moscow Region is expected to be revised within 182 days following the rating action date (June 8, 2017).
The assigned and affirmed 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 Moscow Region participated in their assignment and affirmation.
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 Moscow Region. No conflicts of interest were discovered in the course of credit rating assignment and affirmation.
