The credit rating of the Magadan Region (hereinafter, the Region) is based on the moderately low debt load coupled with a highly likely decline in the debt refinancing risks, as well as moderate budget metrics. The rating is constrained by the low diversification of the economy, which is focused mainly on the mining sector, as well as the growing need to attract debt financing amid insufficient liquidity and 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). The Region's gross regional product (GRP) amounted to RUB 284 bln in 2020. According to the Region's projections, its GRP in 2021 will be RUB 338 bln. In 2021, companies operating in the Region produced over 17% of the total gold mined in Russia, and around 40% of the country’s silver.
KEY ASSESSMENT FACTORS
Moderate budget profile and growing need for debt financing. The averaged1 ratio of the current account balance to current revenues for 2019–2023 will amount to 6%. The balance of current operations, according to the Agency's forecast, will remain positive in 2022, but its volume will be small, which indicates that current revenues are enough to cover current expenditures only.
The share of capital expenditures in the Region’s total expenditures (less subventions) is assessed as moderately high. This share averaged for 2019–2023 will amount to around 14%, however, annually the Region uses transfers from the federal budget to finance approximately a half of its capital expenditures. The averaged share (2019–2023) of tax and non-tax revenues (TNTR) in the Region’s revenues (excluding subventions) will amount to 74%.
ACRA expects the ratio of the modified budget deficit (MBD) to current revenues averaged for 2019–2023 to remain negative and amount to -6%. 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 for these purposes.
In 2021, the budget surplus amounted to 2% of TNTR. This surplus, along with a portion of accumulated liquidity, was applied to repay the Region's debt obligations.
According to the current projections of the Region, TNTR are to grow by 13% in 2022 vs 2021. This growth will be driven by corporate income tax revenues (24% up) and mineral resource extraction tax revenues (26% up). The volume of transfers may drop by over 34%, which will push budget revenues down by 3%. The spending part of the budget is expected to increase by over 5%. The expected deficit at 11% of TNTR will be covered by borrowed funds.
In the six month of 2022, budget revenues declined by about 0.5% y-o-y, while TNTR grew by 15% due to a 20% increase in corporate income tax revenues, and the volume of transfers shrank by 30%. At the same time, budget expenditures grew significantly by 21% in H1 2022. This growth was driven mainly by higher capital expenditures. As of July 1, 2022, the intermediate budget deficit of the Region amounted to RUB 4.4 bln (a RUB 0.3 bln surplus was recorded a year early).
ACRA assumes that in 2022, budget expenditures may grow more significant than projected by the Region. The Agency believes that the Region may cut capital expenditures in 2022 to push down the deficit, almost all of which will have to be financed by borrowings.
1 Hereinafter, averages are calculated according to the Methodology for Assigning Credit Ratings to Regions and Municipal Entities of the Russian Federation.
Moderately low debt load amid high likelihood of lower debt refinancing risks. At the beginning of 2022, the Region's debt amounted to RUB 12.2 bln and included commercial and budget loans (60% and 37%, respectively) and bonds (3%). The share of loans due in 2022 was high in the Region's debt structure. Approximately two-thirds of the debt (RUB 8 bln) were due in 2022, which posed significant refinancing risks for the Region amid rising interest rates.
As of July 1, 2022, the Region's debt increased to RUB 18.0 bln. This is mainly due to the receipt of federal budget loans, which will be utilized to refinance the commercial debt of the Region and its municipalities (10% of the total amount of budget loans will be used to replace commercial loans of municipalities). To date, the Region has already received RUB 5.5 bln of the planned RUB 8.6 bln. In this regard, the risks of refinancing the obligations of the Region will significantly decrease, and the share of short-term debt will decrease. In accordance with the current debt repayment schedule, 43% of the debt is to be repaid (refinanced) in 2022, however, thanks to budget loans, the real amount to be repaid will be significantly less.
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, of which RUB 500 mln will be received this year.
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 39% 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 2019–2023 will not exceed 1.5% of total budget expenses (excluding subventions).
The ratio of the Region's debt to GRP is about 5%, which indicates a low level of the total debt load as per ACRA's methodology.
Low level of liquidity. Since the start of 2021, the Region’s account balances have only covered a small part of monthly budget expenditures. By July 1, 2022, the situation has not changed. Overdue accounts payable remain significant. The Region has made an agreement with the Federal Treasury Department on the provision of a budget loan to replenish the balance of funds in the single budget account. To date, about RUB 2.6 bln has been drawn down.
The liquidity ratio of the Region's budget (calculated excluding funds of autonomous and budgetary institutions) will be 1% due to the expected budget deficit in 2022. This ratio corresponds to a low level according to the Agency's methodology.
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 half of the regional budget’s tax revenues, according to ACRA’s estimate. The second largest industry in terms of tax revenues is trade (95 in 2021). Budget sector industries formed about 14% in aggregate.
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. The unemployment rate averaged for 2018–2021 amounted to 5.1%.
In 2017–2020, the Region’s averaged per capita GRP was more than twice higher than the national average.
KEY ASSUMPTIONS
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In 2022, TNTR growing not below the level projected by the Region.
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In 2022, total budget expenditures no higher than 9%.
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Capital expenditures at least equal to those in 2021.
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The projected budget deficit to be covered by borrowings.
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The entire volume of short-term commercial loans as of January 1, 2022 to be refinanced by budget loans.
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Debt increasing by no more than 1.5 times in 2022 against 2021.
Potential outlook or rating change factors
The Stable outlook assumes that the credit rating will highly 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 20% 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.
