Training on Forecasting, April 7–8

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

The credit rating assigned to the Moscow Region (hereinafter, the Region) is determined by the high level of its economic development, stable budget indicators, well-balanced debt load, and substantial amount of own liquidity. In the short term, planned fast-growing capex and budget deficit will not impair the Region's creditworthiness, because of well-balanced debt repayment profile (small share of short-term market debt, average maturity is three years).

The Moscow Region is a large, industrially well-developed region characterized by its significant contribution to Russia’s economy (RUB 3.7 trillion in 2017, or 5% of the total GRP of Russia). The Region ranks second in the country by population (5% of the total).

Key rating assessment factors

High economic diversification and advantageous location. Despite the historically high concentration of machine-building enterprises, the Region’s dominating industry is food processing (roughly 25% of total production output) which does not belong to the procyclical category. Tax proceeds in the Region’s budget are not dependent on one large taxpayer (or a group of large taxpayers): historically, the largest share of one taxpayer in the budget tax revenues is less than 4%. Proximity to Moscow guarantees a stable selling market for goods manufactured in the Region and a demand for workforce, which ensures a low rate of unemployment (about 60% of the country average in 2014–2018) and a relatively high per capita income (30% higher than the country average in the analyzed period).

Large-scale capital investment program. The Region’s budget is characterized by a persistently large share of own revenues (over 90% of budget revenues net of subventions). About 75% of the total expenditures represent mandatory spending, therefore, the operating balance exceeded 20% of regular revenues in 2015–2018. The average share of capital expenditures was 17% in 2014–2017, and it may grow up to 20% on the back of a large-scale capital investment program expected in 2018–2019. In the base case scenario, we expect such expenditures to be executed at no more than 80%; capital expenditures will be increased in Road Infrastructure, Housing and Utilities, and Education and Healthcare segments, which, coupled with higher mandatory expenditures will result in a significant increase of budget deficit (up to 7–12% of revenues in 2019–2020). The budget deficit may be covered by the Region's own reserves. Irrespective of their significant volume (10%), this may require more commercial borrowings.

Medium debt load coupled with a well-balanced debt structure. By ACRA’s estimates, in 2018–2019, the Region's total debt may exceed 300% of its operating balance (a substantial risk), provided that the current capital investments program is implemented in full. In terms of debt load, this is counterbalanced by the high-quality debt structure. As of the date of the analysis, the share of the short-term debt in the Region's total debt was 9%, and it is 10-fold covered by the expected operating balance less interest expenses; thus, the risk of refinancing is minimal.

Moderate volume of liabilities incurred by public sector enterprises. According to ACRA estimates, the financial and commercial debt of enterprises owned by the Region, which can be repaid from the regional budget in the stress scenario, amounted to RUB 2 bln (less than 2% of the Region’s direct debt as at year-end 2018). The expected participation of the regional budget in the coverage of a part of expenditures required to complete projects that have been managed by Urban Group (now bankrupt) has been taken into account by ACRA as part of mandatory expenditures.

Excessive budget liquidity. The Region regularly places funds on deposits, which allows the Region to cover expenditures for two or three months. In case the 2018–2019 capital investment program is implemented in full, the Region's own liquidity volume may decrease but it will remain high enough to exclude higher interest expenses to compensate differing seasonality of revenues and expenditures.

Key assumptions

  • A portion of public sector enterprises debt may be repaid from the regional budget;
  • Coverage of a part of expenditures required to complete residential development projects that have been managed by Urban Group;
  • the 2018–2019 capital investment program will be implemented by 75–80%;
  • The capex growth will be financed by more than 50% by long-term borrowings or funds arising out of own revenues.

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:

  • Stabilized expected debt load;
  • Regional economy growing notably faster than the national-average.

A negative rating action may be prompted by:

  • Growing mandatory expenses;
  • Budget deficit exceeding 5% for a long period;
  • A shrink in the average market debt maturity.

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).

Rationale. The Agency believes that the above bonds issued by the Moscow Region have the status of senior unsecured debt. Credit rating of this debt instrument corresponds to the credit rating of the Moscow Region.

Regulatory disclosure

The credit ratings of the Moscow Region and the bonds (ISIN RU000A0JX0B9, ISIN RU000A0ZYML3) 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 issue above, Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation has also been used.

For the first time, the credit ratings assigned to the Moscow Region and the bonds (ISIN RU000A0JX0B9, ISIN RU000A0ZYML3) issued by the Moscow Region were published by ACRA on December 12, 2016, December 12, 2016, and December 21, 2017, respectively. The credit rating of the Moscow Region and its outlook and the credit ratings of the bonds (ISIN RU000A0JX0B9, ISIN RU000A0ZYML3) issued by the Moscow Region are expected to be revised within 182 days following the rating action date (December 5, 2018) 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 RF 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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