The credit rating of the Magadan Region (hereinafter, the Region) is based on the moderate operating indicators of the budget and a comfortable debt load. The rating is constrained by the low diversification of the economy, which is mainly concentrated on the mining sector, significant risks of debt refinancing coupled with an insufficient level of free liquidity, as well as the budget’s growing need to attract debt financing amid expected growth in budget expenditures.
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). Its gross regional product (GRP) was approximately RUB 214 bln in 2019 (roughly 0.2% of Russia’s aggregate GRP). According to the Region, its GRP in 2020 will be RUB 236 bln. The Region produces over 10% of the total gold mined in Russia, and around 60% of the country’s silver.
KEY ASSESSMENT FACTORS
Balanced operating indicators and growing need for debt financing. The averaged1 ratio of the balance of current operations to current revenues for 2018–2022 will amount to 1%. The balance of current operations will remain positive in 2021, which indicates that current revenues are sufficient for financing current expenditures.
1 Hereinafter, averages are calculated according to the Methodology for Assigning Credit Ratings to Regions and Municipal Entities of the Russian Federation.
The share of capital expenditures in the Region’s total expenditures is assessed as moderate. The averaged value of this indicator for 2018–2022 will amount to around 11%, however, annually the Region uses transfers from the federal budget to finance approximately two-thirds of its capital expenditures. The averaged share of tax and non-tax revenues (TNTR) in the Region’s revenues (excluding subventions) will amount to 69%.
ACRA predicts that the ratio of the modified budget deficit to current revenues averaged for 2018–2022 may turn negative and reach -5%. This indicates that the Region lacks internal funds to finance capital expenditures and points to the budget’s growing need for additional debt financing.
As of July 1, 2021, the approved budgetary assignments provide for a reduction in the TNTR of the Region by 6% in 2021 at the same time as a 2% reduction in the volume of transfers from the federal budget. TNTR is expected to decline due to profit tax revenues falling by 17%. The spending part of the budget will decline by 1%. The expected deficit of 3% of TNTR will be financed partly by available liquidity and partly through borrowed funds.
As of July 1, 2021, the volume of budget revenues amounted to RUB 22.0 bln, which is 15% higher than the indicator was as of July 1, 2020. TNTR increased by 22% compared to last year: profit tax grew by 23%, personal income tax revenues — by 20%, taxes on total income — by 72%, and taxes on goods and services —by 12%. Transfers from the federal budget increased by 4%, while the volume of dotations declined by 17%. Budget expenses increased by 7% in H1 2021, while the intermediate budget surplus amounted to 2% of TNTR, or around RUB 0.3 bln (a year earlier the budget deficit was RUB 1.1 bln).
ACRA assumes that during the remaining period of 2021, budget expenditures will continue to grow at the same pace, and higher budget revenues will not be able to fully compensate this. This situation may lead to an increase in the deficit relative to the level specified in the budget law. This deficit would exceed the amount of free liquidity, and according to ACRA, will be financed by raising debt.
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 bln and consisted of bank and budget loans (39% and 56%, respectively), as well as bonds (5%). As of August 1, 2021, the Region’s debt had declined by RUB 2.5 bln (to RUB 10.6 bln), with bank loans accounting for the bulk of repayments. In terms of the current volume of debt, budget loans account for 69% of the debt portfolio, bank loans account for 25%, and bonds account for the rest. The Region’s current debt repayment schedule is better balanced than it was at the start of the year. However, significant payments are scheduled for the next two years, during which the Region must repay 60% of its debt. 30% of debt is subject to repayment in 2021.
According to the Region, it is not part of the program to restructure part of its bank debt using budget loans due to its low share of commercial borrowings in comparison with the volume of consolidated TNTR of the Region.
At the end of 2020, the Region’s debt to current income ratio had declined to 33% from 43% in 2019. This indicator will remain practically unchanged in 2021, despite the financing of the projected deficit.
The Region’s interest expenses are not burdensome: the averaged level of interest expenses in 2018–2022 will not exceed 1.5% of total budget expenses (excluding subventions).
Insignificant available liquidity. Since the start of 2021, the Region’s account balances have only covered a small part of monthly budget expenditures. As of August 1, 2021, the situation remains unchanged. Overdue accounts payable remain significant, although ACRA notes their gradual decline. The Region signed an agreement with the Federal Treasury Department (FTD) on the provision of a budget loan to replenish the balance of funds in the single budget account and attracted this sort of loan twice in 2021 (the budget loan provided in December 2020 to refinance the FTD loan was repaid by the Region).
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. In 2020, six of the ten largest enterprises in the Region operated in the precious metals mining sector.
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 2016–2019, the Region’s average per capita GRP was more than double the national average. Unemployment averaged for 2017–2020 was 5.3%.
Budget expenses growing by no more than 7% and TNTR increasing by at least 6% in 2021;
Financing the projected budget deficit using accumulated liquidity and resorting to borrowing;
Debt increasing by no more than 10% in 2021 compared to the indicator for 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:
Achieving a long-term sustainable debt-to-current revenues ratio below 30%;
Maintaining the positive modified budget deficit;
Reducing the share of short-term debt;
Liquidity growing in 2021.
A negative rating action may be prompted by:
Further growth of the budget’s need for debt financing;
Balance of current operations falling to negative values;
Execution of the budget with a deficit that exceeds ACRA’s projections.
Magadan Region, 35001 (ISIN RU000A0ZYL48), maturity date: December 25, 2022, issue volume: RUB 1 bln — BBB-(RU).
Rationale. In the Agency’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.
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 Assigning Credit Ratings to Regions and Municipal Entities 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 on 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 sovereign credit rating revisions and publications.
The credit ratings were assigned based on 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), and ACRA’s own databases. The credit ratings are solicited and the Government of the Magadan Region participated in their assignment.
In assigning the credit ratings, ACRA used only information, the quality and reliability of which was, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
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.