The credit rating of the Magadan Region (hereinafter, the Region) is based on the low diversification of the economy, moderately high debt load, high refinancing risks, and limited liquidity.
The Magadan Region is located in the Far Eastern Federal District (FEFD) and is part of Russia’s Far North. The Region is home to around 140,000 people (0.1% of Russia’s population). According to the Region, its gross regional product (GRP) was approximately RUB 191 bln in 2020 (roughly 0.2% of Russia’s aggregate GRP). The Region produces over 10% of the total gold mined in Russia, and around 60% of the country’s silver.
Key rating assessment factors
The Region’s budget has benefitted from high gold and silver prices during the pandemic. The Region finished 2020 with a surplus of 2% of tax and non-tax revenues (TNTR). This was due to higher TNTR (+28%). Two-thirds of the growth in TNTR came from profit tax in the metal ore mining sector, which was the result of the favorable situation in the gold and silver market in 2020. Substantial growth was also recorded for mineral extraction tax and personal income tax. In addition, transfers from the federal budget increased in 2020 (+18% compared to 2019).
The Region’s budget law1 foresees revenues falling by 20% in 2021, including TNTR declining by 13% and transfers declining by 31%. In addition, expenditures are expected to decline by 17% year-on-year. The 2021 budget deficit will account for 4% of TNTR and will be financed by increased borrowing and the budget’s account balances.
The ratio of the balance of current operations to current revenues2 for 2021 stands at -2%. The averaged3 value of this indicator in 2017–2021 continues to be moderate (4%). The averaged ratio of the modified budget deficit to current income in the same period will be slightly below zero, which indicates that the budget needs additional debt finance.
The averaged share of TNTR in revenues (excluding subventions) will amount to 65% for 2017–2021, while capital expenditures will amount to 10% of aggregate budget expenditures (excluding subventions). More than half of these expenditures are financed using transfers from the federal budget.
1 Law of the Magadan Region No. 2452–OZ dated December 26, 2019 (with amendments dated July 29, 2020) “On the regional budget for 2020 and the planned period of 2021 and 2022”.
2 Hereinafter, income and expenses do not include transfers from PJSC RusHydro provided under the program for achieving basic tariff levels in the regions of the FEFD.
3 Hereinafter, averages are calculated according to the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation.
The high share of short-term debt leads to refinancing risks. As of the start of 2021, the Region’s debt stood at RUB 13.06 bln and consisted of bank and budget loans (39% and 56%, respectively), as well as bonds (5%). The peak in debt repayments (RUB 6.1 bln, or 47% of the aggregate indicator) is scheduled for 2021 and is distributed approximately equally between bank and budget loans (taking into account the Federal Treasury Department loan refinanced in December 2020 until July 1, 2021).
The Region’s debt declined by 8% (RUB 1.1 bln) in 2020, and by February 1, 2021, the Region had repaid another RUB 1 bln worth of bank loans. Despite this, refinancing risks remain high.
At the end of 2020, the Region’s debt to current income ratio stood at 33% and should grow to 39% by the end of 2021 based on the current parameters of the regional budget. Nevertheless, this factor does not influence the assessment of the Region’s debt profile.
The Region’s interest expenses are not burdensome: the averaged level of interest expenses in 2017–2021 will amount to around 2% of total budget expenses (excluding subventions). The total debt of municipal entities has been falling since 2018. As of the end of 2020, it amounted to 40% of their internal revenues.
The Region’s account balances only cover a small part of monthly budget expenditures, while the volume of overdue accounts payable remains significant, although ACRA notes that it is declining.
The Region’s economic profile is highly concentrated on the mining of non-ferrous metals. The mining industry, the Region’s leading sector, accounts for more than 40% of the regional budget’s tax revenues, according to ACRA’s assessment. The concentration of mining gold and silver results in volatility of revenues, however, in 2020 this area of activity helped the Region to finish the year with a budget surplus.
The average wage in the Region exceeds the subsistence wage by more than 3.5x. However, high prices due to climate and logistics costs offset the effect of this figure for the population. This causes a constant migration outflow. High wages in the Region provide for the collection of comparatively high personal income tax revenues, and unemployment is relatively low. In 2015–2018, the Region’s average per capita GRP was more than double the national average.
Key assumptions
- TNTR falling by 13% year-on-year in 2021;
- Execution of the 2021 budget with a deficit of around 4% of TNTR;
- Debt growing by 3% in 2021 compared to 2020.
Potential outlook or rating change factors
The Stable outlook assumes that the credit rating will most likely remain unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- Stable growth of budget liquidity;
- Extension of the debt repayment schedule and reduction of debt load coupled with a reduction in the level of overdue payables.
A negative rating action may be prompted by :
- Debt load growing to over 55% of current revenues;
- Lower share of internal revenues in the budget;
- Lower modified budget deficit indicator.
Issue ratings
Magadan Region, 35001 (ISIN RU000A0ZYL48), maturity date: December 25, 2022, issue volume: RUB 1 bln — BBB-(RU).
Rationale. In ACRA’s opinion, the bond of the Magadan Region is senior unsecured debt, the credit rating of which corresponds to the credit rating of the Magadan Region.
Regulatory disclosure
The credit ratings of the Magadan Region and the bond issued by the Magadan Region (ISIN RU000A0ZYL48) 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. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments Under the National Scale for the Russian Federation was also applied to assign the credit rating to the above issue.
The credit ratings of the Magadan Region and the bond issued by the Magadan Region (ISIN RU000A0ZYL48) were published by ACRA for the first time on April 26, 2018.
The credit rating of the Magadan Region and its outlook and the credit rating of the bond issued by the Magadan Region (ISIN RU000A0ZYL48) 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 credit ratings were assigned based on the data provided by the Government of the Magadan 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 Magadan Region participated in their assignment.
No material discrepancies between the provided data and the data officially disclosed by the Magadan Region in its financial statements have been discovered.
ACRA provided no additional services to the Government of the Magadan Region. No conflicts of interest were discovered in the course of credit rating assignment.
