The credit rating of the Magadan Region (hereinafter, the Region) is based on the moderate operating indicators of the budget and a moderately low debt load. The rating is constrained by the low diversification of the economy, which is mainly focused on the mining sector, as well as the growing need to attract debt financing amid an expected growth of budget deficit in 2022.
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 GRP in 2020 will be RUB 287 bln. The Region produces over 10% of the total gold mined in Russia, and around 60% of the country’s silver.
KEY ASSESSMENT FACTORS
Moderate budget profile and growing need for debt financing. The averaged1 ratio of the balance of current operations to current revenues for 2018–2022 will amount to 6%. The balance of current operations will remain positive in 2022, but its volume is expected to be much lower than in 2021.
The share of capital expenditures in the Region’s total expenditures is assessed as moderate. This share averaged for 2018–2022 will amount to around 11%, however, annually the Region uses transfers from the federal budget to finance approximately a half of its capital expenditures. The averaged share (2018–2022) of tax and non-tax revenues (TNTR) in the Region’s revenues (excluding subventions) will amount to 68%.
ACRA expects the ratio of the modified budget deficit (MBD) to current revenues averaged for 2018–2022 to remain negative and amount to -1%. The MBD forecasted for 2022 indicates that the Region lacks internal funds to finance capital expenditures and points to the budget’s growing need for additional debt financing.
In 2021, the budget revenues grew by 8% to RUB 51.7 bln, while TNTR increased by 15%, and the most significant increase was demonstrated by personal income tax and profit tax revenues (15% and 8%, respectively). The volume of transfers declined insignificantly (-2%), the budget's expenditure side grew by about 9%, and the budget surplus amounted to RUB 0.5 bln (2% of TNTR).
According to the data provided by the Region, TNTR are to decline slightly by 1% in 2022, along with a reduction in the volume of transfers by over 40%. This will push budget revenues down by 16%. The spending part of the budget will decline by 12%. The expected deficit of 4% of TNTR will be covered mostly by borrowed funds.
ACRA assumes that in 2022, due to the uncertainty caused by the pandemic, budget expenditures may decline less significant than projected by the Region. This may lead to an increase in the deficit relative to the level planned by the Region. Almost entire deficit will be financed by raising debt.
1 Hereinafter, averages are calculated according to the Methodology for Assigning Credit Ratings to Regions and Municipal Entities of the Russian Federation.
Refinancing risks are caused by the significant share of short-term debt and the low level of free liquidity. At the beginning of 2022, the Region's debt amounted to RUB 12.1 bln and included commercial and budget loans (60% and 37%, respectively) and bonds (3%). Relative to January 1, 2021, the debt decreased by 7%, but the volume of bank borrowings increased by almost one and a half times. The growth in commercial borrowings is due to the fact that at the beginning of 2021, the Region decided to borrow a bank loan to refinance a budget loan issued in 2020 to refinance a short-term loan from the Federal Treasury Department (FTD).
The share of loans due in 2022 is high in the Region's debt structure. Given the current repayment schedule, approximately two-thirds of the debt (RUB 8 bln) is due in 2022, which poses significant refinancing risks for the Region amid rising interest rates. Most of the debt due in 2022 (92%) is bank loans, another 5% is bonds, and the rest is budget loans.
In 2021, the Region joined the infrastructure budget lending program. The expected amount of funds to be raised under the program in 2022–2023 is about RUB 600 mln.
By the end of 2021, the Region's ratio of debt to current revenue decreased to 27% from 33% in 2020. By the end of 2022, the ratio may rise to 35% due to the need to finance the projected deficit, while the debt burden will remain at a moderately low level (according to the Agency's methodology).
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).
Since the start of 2021, the Region’s account balances have only covered a small part of monthly budget expenditures. By January 1, 2022, the situation has not changed. Overdue accounts payable remain significant. The Region is seeking to make an agreement with the FTD on the provision of a budget loan to replenish the balance of funds in the single budget account. In 2021, the Region borrowed such a loan three times.
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 estimate. In 11M 2021, about 50% of tax revenues came from this industry.
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%.
KEY ASSUMPTIONS
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In 2022, TNTR decreasing not below the level projected by the Region;
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In 2022, current expenses declining less aggressively than it is planned by the Region;
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Covering the projected budget deficit mostly by borrowings;
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Debt increasing by no more than 25% in 2022 against 2021.
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:
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Achieving a long-term sustainable debt-to-current revenue ratio below 30%;
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No need to attract debt financing for current and capital purposes;
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Reducing the share of short-term debt below 40% of total debt;
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Free liquidity growing significantly in 2022.
A negative rating action may be prompted by:
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Further growth of the budget’s need for debt financing;
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Balance of current operations falling to negative values;
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Sustainable decline in the share of capital expenditures;
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Execution of the budget with a deficit that exceeds ACRA’s projections, which may increase the debt load.
ISSUE Ratings
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.
REGULATORY DISCLOSURE
The credit ratings of the Magadan Region and the bond (ISIN RU000A0ZYL48) issued by the Magadan Region 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 (ISIN RU000A0ZYL48) issued by the Magadan Region 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 (ISIN RU000A0ZYL48) issued by the Magadan Region 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 identified in the course of credit rating assignment.
