ACRA affirms AA+(RU) to the Moscow Region, outlook Stable, and AA+(RU) to bond issues

The credit rating of the Moscow Region (hereinafter, the Region) is based on a highly developed regional economy, stable budget, moderately low debt load, and high budget liquidity.

The Moscow Region is a large, industrially developed region characterized by its significant contribution to Russia’s economy (RUB 4.2 tln in 2018, or 5% of Russia’s total GRP). The Region ranks second in the country by population (5% of the total).

Key rating assessment factors

Moderately low debt load with high budget liquidity. According to ACRA, debt to current income (calculated according to ACRA’s methodology) may increase due to a possible reduction in the Region’s tax and non-tax revenues (TNTR) and the attraction of new borrowings to finance the deficit provided for by the regional budget law. This figure should grow from 30% for 2019 to 41% for 2020 and to 48% for 2021, indicating a moderately low debt load. As of October 1, 2020, the Region’s debt comprised bonds (53%), bank loans (35%), and budget loans (12%). In 2020, the Region is set to repay 11% of its debt obligations, and 16% in 2021. The averaged1 level of interest expenses in 2017−2021 should be about 2% of total budget expenses, excluding subventions, indicating low risk and that these expenses are not burdensome for the regional budget. The region has sufficient liquidity to meet its expense obligations on time, including interest payments. Until July 2020, the Moscow region regularly placed temporarily free budget funds in bank deposits. Interest income from liquidity management operations over the past four years covers at least half of the Region’s interest expenses. The regional government uses a short-term loan provided by the Federal Treasury Department to finance projected cash gaps.

1 Hereinafter, averages are calculated according to the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation.

Self-sufficient budget with a flexible spending structure. The Region’s budget is characterized by consistently high internal revenues. The average ratio of TNTR to budget revenues excluding subventions should equal 91% for 2017−2021. The average share of capital expenses in the Region’s total expenses (excluding subventions) should equal 13% for this period. According to ACRA’s methodology, the average ratio of the balance of current operations to current revenues should equal 4% for 2017−2021, while the ratio of the average modified budget deficit to current revenues should be -10%. This indicates that the Region’s current revenues are enough to cover its current expenses as well as the need to borrow funds to finance capital expenses.

The Region enjoys a high level of economic diversification and a favorable geographic location. Despite the historically high concentration of engineering enterprises in the Region, the dominant industry is the food industry (about 25% of industrial production), which is not related to procyclic industries. The Regional budget’s tax revenues do not depend on one large taxpayer or group of large taxpayers. Historically, the maximum share of a single taxpayer in the budget’s tax revenues is less than 4%. The proximity to Moscow guarantees a stable market for products manufactured in the Region and demand for labor resources. This ensures a low unemployment rate (about 60% of the national average in 2016-2019) and relatively high average wages compared to the subsistence minimum in the Region. In 2019, the average wage exceeded the subsistence minimum by 3.9 times. The Region’s GRP is growing faster than the Russian average. In 2018, the Region’s GRP growth was 3.2%, while the national average was 2.8%. The growth rate of the Region’s industrial production in 2016-2019 was significantly ahead of the national average (at least 10% per year with the national average at 2-3%).

Key assumptions

  • Reduction in TNTR by 5% in 2020 with subsequent growth by 4% in 2021;
  • Reduction in regional budget expenses if actual revenues are lower than planned;
  • Maintaining a debt strategy that does not entail growth in the budget’s debt load above 50% TNTR;
  • Maintaining high budget liquidity.

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:

  • Reduction in debt load lower than 30% of current revenues;
  • Increase in the average maturity of the debt portfolio over 3.5 years.

A negative rating action may be prompted by:

  • Growth in current budget expenses without a corresponding increase in revenues;
  • Significant decrease in budget liquidity;
  • Increased debt load above 50% of current revenues;
  • Significant reduction in the average maturity of market debt.

Issue ratings

The Moscow Region, 35010 (ISIN RU000A0JX0B9), maturity date: November 21, 2023, issue volume: RUB 25 bln — AA+(RU).

The Moscow Region, 34011 (ISIN RU000A0ZYML3), maturity date: December 22, 2022, issue volume: RUB 25 bln — AA+(RU).

The Moscow Region, 34012 (ISIN RU000A100XP4), maturity date: October 8, 2024, issue volume: RUB 25 bln — AA+(RU).

The Moscow Region, 34013 (ISIN RU000A101988), maturity date: December 20, 2024, issue volume: RUB 14 bln — АА+(RU).

The Moscow Region, 34014 (ISIN RU000A101WL3), maturity date: July 8, 2025, issue volume: RUB 28 bln — АА+(RU).

Rationale. In ACRA’s opinion, the bonds listed above are senior unsecured debt instruments, the credit ratings of which correspond to the credit rating of the Moscow Region.

Regulatory disclosure

The credit ratings of the Moscow Region and the bonds (RU000A0JX0B9, RU000A0ZYML3, RU000A100XP4, RU000A101988, RU000A101WL3) issued by the Moscow Region have been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings 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 course of assigning a credit rating to the bond issues above, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation has also been used.

The credit ratings assigned to the Moscow Region and the bonds (RU000A0JX0B9, RU000A0ZYML3, RU000A100XP4, RU000A101988, RU000A101WL3) issued by the Moscow Region were published by ACRA for the first time on December 12, 2016, December 12, 2016, December 21, 2017, October 9, 2019, December 23, 2019, and July 8, 2020, respectively. The credit rating of the Moscow Region and its outlook and the credit ratings of the bonds (RU000A0JX0B9, RU000A0ZYML3, RU000A100XP4, RU000A101988, RU000A101WL3) issued by the Moscow Region are expected to be revised within 182 days following the publication date of this press release as per the Calendar of planned sovereign credit rating revisions and publications.

The above credit ratings are based on the data provided by the Moscow 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 ratings are solicited, and the Government of the Moscow Region participated in their assignment.

No material discrepancies between the provided data and the data officially disclosed by the Moscow Region in its financial report have been discovered.

ACRA provided no additional services to the Government of the Moscow Region. No conflicts of interest were discovered in the course of credit rating assignment.

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