The credit rating assigned to the Magadan Region (the Region) is based on the Region's high debt load coupled with irregular repayment schedule, unsatisfactory taxation planning and volatile tax revenues. The high per capita GRP and per capita income have limited effects on the tax revenues of the budget in view of the low diversification of the regional economy and little effect of the gold mining sector on other industries. The regional economy prospects are also restricted by the high living costs and the need to import most goods.

The Magadan Region is located in the Far East Federal District, and it borders with four regions of Russia. The Region has the status of Far North territory. 0.1% of the Russian population live in the Region; the Region's GRP accounts for 0.2% of the total gross regional product of Russia. About 10% and two thirds of gold and silver, respectively, are mined in the Magadan Region of the total volumes mined in the Russian Federation.

Key rating assessment factors

The regional economy and budget depend entirely on business and management decisions taken in the gold and silver mining industry. The development level of the regional economy is determined completely by the leading industry: in 2016, the share of mineral extraction reached 39%, while the contribution of the sector to the industrial output of the Region exceeded 80%. In 2017, the planned processing of poor ores provoked a significant decrease in silver production, which affected the budget and will affect the economic performance of the Region, including production indices. High prices eliminate the effect of high wages: regardless that the per capita cash income in the Region is more than 50% higher than the national average, and the Region ranks fifth in Russia in terms of the average wages, it also ranks fifth among the Russian regions in terms of the subsistence minimum. The unemployment rate as per the ILO methodology is lower than the national average, and due to the permanent migration outflow (since 2000 the Region's population has decreased by 28%), the share of the working-age population is significantly (about 4%) lower than that in Russia as a whole.

The budget planning accuracy is low. The actual budget revenues has regularly deviated by more than 10% from the latest version of the budget law, which is caused by inconsistent tax revenues. In the planned budget, the regional government indicates the amount of target tax revenues (calculated by the RF Ministry of Finance for the purposes of budget equalizing grants intended for the Region), which it is unable to attain. In some cases, the unsatisfactory budget planning is explained by factors beyond the control of the regional government: fluctuations in commodity prices, a decrease in the mining volumes, a reduction in the number of employees, late start-up of gold mining projects, etc.

High mandatory expenditures and unstable tax revenues result in low budget discipline. The regional budget depends heavily on the single dominant branch, the mining industry, which generates (predominantly, by three largest taxpayers) up to a half of the budget tax revenues. The operating balance of the Region is very volatile. The reason is the instability of tax revenues and a high share of mandatory budget expenditures (81% on average in 2015–2018). In 2016, the operating balance reached 14%, supported by an increase in the profit tax revenues, which were requested for return in 2017. The operating balance was 4% of regular revenues in 2017. In case tax revenues grow as expected, the indicator will grow by 14–16% in the period from 2018 to 2020. The Region does not have a reserve for reducing capital expenditures in favor of the current expenses, as the share of capital expenditures is only 5% on average after adjusting for the federal transfer (according to the data for 2015–2017 and the Region's forecast for 2018).

High debt load is aggravated by the irregular schedule of debt repayments and the significant amount of payables. More than a half of the Region's debt is market debt (mostly bank loans). In 2017, the debt to operating balance ratio of the Region was 11.4; the reason is the fall in the operating balance due to insufficient tax revenues and forced returns. In 2018, if the tax revenues are collected as planned, the ratio is expected to be at 3.4, and by 2020, it is predicted to decline gradually to 2.3. The ratio of the operating balance less interest expenses to the amount of debt repayments (excluding the intra-year utilization of loans provided by the Office of the Federal Treasury) is unstable year on year due to the irregular schedule of debt repayments. The peak of debt repayments and, correspondingly, the increase in the refinancing risk are expected in 2020, when the ratio will be 0.7 (a half of the current debt, primarily bank loans in the form of non-revolving credit lines is planned to be repaid in 2020). If long-term financial instruments with a structured debt repayment schedule are used, the ratio will cease to be volatile. As of January 1, 2018, overdue payables (primarily to utility companies) amounted to RUB 1.5 billion.

Sufficient budget liquidity. The Region has liquidity sufficient for timely fulfillment of expenditure obligations, including interest payments. On the other hand, the balances of funds on the budget accounts at the beginning of month are regularly lower than the current month's expenditures, and the Region regularly experience the needs for funds to cover cash gaps. When necessary, the regional government borrows short-term loans from the Office of the Federal Treasury (since the agreements with banks are non-revolving credit lines, the balances are almost not manageable).

Key assumptions

  • The absolute amount of mandatory expenditures in 2019–2020 will not exceed those in 2017–2018;
  • In 2018, the tax revenues will correspond to those expected as of the rating action date;
  • The federal budget transfers for the Region in 2019–2020 will not be lower than those in 2016–2018;
  • The capital expenditures in 2019–2020 will not be lower than those in 2017–2018.

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:

  • Higher tax revenues against the planned level for 2018, not accompanied by a similar growth in mandatory expenditures;
  • Higher capital expenditures within the regional budget;
  • Better debt repayment schedule;
  • Lower dependence of the budget on the external sources of liquidity.

A negative rating action may be prompted by:

  • 2018 tax revenues lower than those planned as of the rating action date, accompanied by budget expenditures as planned;
  • Higher mandatory expenditures, not supported by a similar growth in budget revenues.

Issue ratings

Credit rating rationale. In ACRA’s opinion, the below bonds issued by the Magadan Region are senior unsecured debt instruments, and their credit rating is equal to the rating assigned to the Magadan Region, i.e. BBB-(RU).

Key issue properties

1)   RegS / ISIN: RU34001MGN0 / RU000A0JV3Z4

Issue volume / outstanding

RUB 1 bln / RUB 0.4 bln

Final placement date / Repayment date

October 13, 2015 / December 24, 2018

 

2)   RegS / ISIN: RU35001MGN0 / RU000A0ZYL48

Issue volume / outstanding

RUB 1 bln / RUB 1 bln

Final placement date / Repayment date

December 20, 2017 / December 25, 2022

Rating history

None.

Regulatory disclosure

The credit ratings have been assigned to the Magadan Region and to bonds issued by the Magadan Region (RU000A0JV3Z4, RU000A0ZYL48) under the national scale for the Russian Federation based on the Methodology for Credit Rating 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. In the process of credit rating assignment to the above issues, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied.

ACRA assigns credit ratings to the Magadan Region and to issues of government securities of the Magadan Region (RU000A0JV3Z4, RU000A0ZYL48) for the first time.

The credit rating of the Magadan Region and its outlook as well as the credit ratings of government securities issues of the Magadan Region (RU000A0JV3Z4, RU000A0ZYL48) are expected to be revised within 182 days after the rating action date (April 25, 2018) in compliance with the 2018 calendar of planned sovereign credit rating revisions and publications.

The credit rating was assigned based on the data provided by 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 rating is solicited, and the Government of the Magadan Region participated in its assignment.

No material discrepancies between the data provided and the data officially disclosed by the Magadan Region in its financial report 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.

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Analysts

Elena Anisimova
Senior Director - Head of Sub-sovereign Ratings Group
+7 (495) 139 04 86
Ilya Tsypkin
Senior Analyst, Sub-sovereign Ratings Group
+7 (495) 139 03 45
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