The credit rating assigned to the Magadan Region (the Region) is based on the Region’s high debt load, volatile tax revenues, and unsatisfactory taxation planning. High levels of per capita GRP and household 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 high cost of living and need to import most goods also limits the development of the regional economy.
The Magadan Region is located in the Far East Federal District. The region is part of the Far North Territory. 0.1% of the Russian population live in the Region and its GRP accounts for 0.2% of Russia’s total GRP. The Region produces about 10% of the total volume of gold mined in Russia, and about two thirds of Russia’s silver.
Key rating assessment factors
High debt load of the Region’s budget. Bank loans account for half of the Region’s current debt (as of October 1, 2018) and bonds account for 9%. The need to replace the federal treasury loan will change the debt structure at the end of the year in terms of growth of the market debt share of (up to two thirds of the total volume). The ratio of debt and operational balance of the Region in 2018 and 2019 is expected to be four times higher or more, which reflects a high risk level. At the same time, the current debt repayment schedule improved due to mid-term bank loans. The operating balance after interest expenses will be three times higher than the amount of debt that was planned to be repaid in 2018 (excluding the annual use of credit lines and federal treasury loans). At the current moment, the maximum amount of debt repayment and the increased risk of refinancing will come in 2021 due to the need to repay 43% of the current debt (mainly market debt). The region has paid off a substantial amount of accounts payable, reducing it by 5 times as compared to January 1, 2018. Because the Region receives loans in the form of non-revolving credit lines (according to contracts with banks), balance management is virtually nonexistent.
Low indicators of budget discipline and a poorly planned budget are due to a high level of necessary expenses and unstable tax revenues. The Region’s budget depends primarily on the mining industry (the Region’s leading sector) which accounts for half of the budget’s tax revenue (mainly at the expense of the three largest taxpayers). The volatility of the Region’s operating balance is due to its unstable tax revenue and the budget’s high amount of necessary expenditures (an average of 81% from 2015 to 2018). The region has no reserves for reducing capital expenditures in favor of current ones, as the level of capital expenditures is only 5% on average after adjustment for the federal transfer (data for 2015-2017 and the Region's outlook for 2018). Deviation from the actual execution of the budget revenues from the latest version of the law regularly exceeds 10% due to the main types of tax revenues. The reasons for this are the following: using tax revenues calculated by the Ministry of Finance of the Russian Federation for the purposes of calculating equalization transfer of the Region, fluctuation in prices for mined minerals, reduction in mineral extraction, reduction in the amount of personnel, and postponing the launch of projects aimed at developing gold mining fields.
Development of the economy and the stabilizing of the budget of the Magadan Region completely depend on the economic and administrative decisions of enterprises producing gold and silver. As the Region’s leading industry, mining constitutes more that 80% of industrial production and as a result, the Region’s economy is completely dependent on it. High prices fully offset high salaries. However, the average per capita income in the Magadan Region is more than 50% higher than the average in Russia. In terms of wages calculated in the economy as a whole, the Region is in fifth place. The subsistence minimum is also fifth among the regions of the Russian Federation.
The unemployment rate, according to the methodology of the international labor organization, in the Region is lower than the national average, and the percentage of the working-age population is significantly lower (about 4%) than in the whole of the Russian Federation due to the constant migration outflow (the population has decreased by 28% since 2000).
Key assumptions
- Retention of the nominal amount of the Region’s necessary expenses in 2019-2020 (not exceeding the average values for 2017-2018);
- Fulfillment of the declared amount of tax revenues in 2018;
- Transfers to the Region in 2019-2020 no lower than the average for 2016-2018;
- Maintaining the level of capital expenditures in 2019-2020 no lower than the indicators for 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:
- Growth of tax revenues relative to the level planned for 2018 without equivalent growth of necessary expenses;
- Future improvement in the debt repayment schedule;
- Reduction in the dependency of the budget on external sources of liquidity.
A negative rating action may be prompted by:
- Non-fulfillment of tax revenues by the Region in 2018 with simultaneous fulfillment of the declared amount of expenses;
- Growth of necessary expenses of the Region’s budget, not supported by the growth of the budget revenues.
Issue ratings
Magadan Region, 34001 (ISIN RU000A0JV3Z4), repayment date - December 24, 2018, issue volume – RUB 1 bln. - BBB-(RU).
Magadan Region, 35001 (ISIN RU000A0ZYL48), repayment date - December 25, 2022, issue volume – RUB 1 bln. - BBB-(RU).
Credit rating rationale. In ACRA’s opinion, the above 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.
Regulatory rating
The credit ratings have been assigned to the Magadan Region and to bonds issued by the Magadan Region (ISIN RU000A0JV3Z4, ISIN 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.
The credit rating of the Magadan Region and credit ratings of issued government securities of the Magadan Region (ISIN RU000A0JV3Z4, ISIN RU000A0ZYL48) were published by ACRA for the first time on April 26, 2018.
The credit rating of the Magadan Region and its outlook as well as the credit ratings of government securities issues of the Magadan Region (ISIN RU000A0JV3Z4, ISIN RU000A0ZYL48) are expected to be revised within 182 days after the rating action date (October 23, 2018) in compliance with the Calendar of planned sovereign credit rating revisions and publications.
The credit ratings were 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 Magadan Regional Government participated in its assignment.
No material discrepancies between the data provided and the data officially disclosed by the Magadan Region in its financial reports have been discovered.
ACRA provided no additional services to the Magadan Regional Government. No conflicts of interest were discovered in the course of credit rating assignment.
