ACRA affirms BBB+(RU) to the Murmansk Region, changes outlook to Positive

The credit rating assigned to the Murmansk Region (hereinafter, the Murmansk Region, or the Region) is determined by the relatively low flexibility of budgetary expenses and a highly self-sufficient budget. The change in outlook is due to the stabilization of the operating balance, reduced debt volume, and the expected continuation of this trend in the medium term.

The Murmansk Region is located in the Northwestern Federal District and shares land borders with Finland and Norway. The Region’s territory belongs to the Far North region. 0.5% of the Russian population lives in the Region and its gross regional product (GRP) equals 0.6% of Russia’s total GRP. The Region’s GRP totaled RUB 457 bln in 2018.

Key rating assessment factors

The Region’s debt load is average. By the end of 2018, the Region’s debt had reduced slightly (by 1%) and as a result of the simultaneous growth of the operating balance, the ratio of these two values decreased from 2.04 to 1.98. The interest expense to operating balance ratio amounted to 6-7% in 2017-2018 and is expected to stay at that level in 2019. The Region’s debt structure did not change considerably and at the end of 2018 was made up of almost equal parts budget and bank loans. By the end of 2019, the debt structure could change in favor of commercial loans if the Region executes in full the current version of its budget deficit. ACRA assesses the Region’s refinancing risks as low (not including loans that the Region borrowed from the Federal Treasury, the operating balance after interest payments exceeds the volume of debt to be repaid in 2019 by three times; taking into account Federal Treasury loans, the ratio exceeds 1.2.). Peak debt payment (not including Federal Treasury loans) depends on the maturity date of bank loans and will come in 2021; its volume as of April 1, 2019, was 28% of the current debt.  

The high level of mandatory expenses puts pressure on the Region’s budget. The Region finances its expenses primarily with tax and non-tax revenues (TNTR). The average share of TNTR (excluding subventions) is assessed at 90%. However, the share of mandatory expenses is also very high at 82%, which limits the flexibility of budgetary expenses. Nevertheless, at the end of 2018, the Region’s operating balance to regular income ratio amounted to 15% (the expected value at the end of 2019 is 16%). The Region finances its capital expenses primarily with its own revenues and those capital expenses average 12% of total expenses. Despite the fact that the Region’s budget revenues largely depend on the mining sector, the range of raw materials extracted in the Region make its tax revenue structure rather diversified. 

The Region’s resource-oriented economy generates almost a third of its GRP through mining, metallurgical production, and fishing. The Region’s economy is affected by global prices on extracted minerals (apatite and nickel production generates an average of 15% of the Region’s GRP while metallurgy accounts for 15% of industrial production). The Region's economy also depends on the procyclical transport industry (9-11% of GRP), in particular, on the Murmansk commercial seaport, through which thermal coal transshipped. According to ACRA, in 2018 non-ferrous metal production accounted for about a fifth of the regional budget’s tax revenues. The public administration and defense sectors provide up to 16% of revenues. Other important industries are transportation and storage and fishing.

Key assumptions

  • Maintaining mandatory expenses within 82% of total budgetary expenses;
  • Financing capital expenses partially through loans;
  • Meeting the terms of agreement on budget loan restructuring. 

Potential outlook or rating change factors

The Positive outlook assumes that the rating will most likely be changed within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Increase in tax revenue and reduction in mandatory expenses;
  • Reduction in the budget’s dependence on external liquidity sources.

A negative rating action may be prompted by:

  • Increase in the regional budget’s mandatory expenses without an equal increase in revenues;
  • Increased debt load due to the need to cover the increase in current expenses. 

Regulatory disclosure

The credit rating has 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.

The credit rating of the Murmansk Region was published by ACRA for the first time on October 18, 2017. The credit rating and its outlook are expected to be revised within 182 days following the publication date of this press release in compliance with the calendar of planned sovereign credit rating revisions and publications.

The credit rating was assigned based on the data provided by the Murmansk 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 Murmansk Region Government participated in its assignment.

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

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

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