ACRA upgrades the Murmansk Region to A-(RU), outlook Stable

The credit rating of the Murmansk Region (hereinafter, the Murmansk Region, or the Region) was upgraded on the high tax revenue collection rate and the expected increase in the operating balance. The rating is based on the medium debt load, high budget self-sufficiency, and medium internal liquidity of budget. The rating is restricted by the relatively low flexibility of budget expenses and the rate of unemployment substantially higher than the Russian average.

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 467.7 bln in 2018.

Key rating assessment factors

The Region’s debt load is average. By the end of 2019, the Region’s debt to operating balance ratio is expected to be within 1.6-2.6 (depending on the budget execution), which indicates the medium to elevated risk. The debt service expenses are not burdensome for the Region, as they will not exceed 6.5% of the operating balance in 2019. At the end of 2018, the Region’s debt structure was made up of budget and bank loans in almost equal proportions. 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, because the operating balance after interest payments is 3.3 times higher than the debt to be repaid in 2019 (without the Federal Treasury loans borrowed by the Region), this ratio is equal to 1.7 if such loans are taken into account. As of October 1, 2019, the amount of credit facilities not utilized by the Region and due in 2020–2021 exceeded the debt to be repaid by the end of 2019 (including Federal Treasury loans) by 3.4 times and the monthly average expenses in January–August 2019 by three times, which evidences that the Region has substantial reserves of external sources of liquidity to refinance the debt due this year.

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%. ACRA expects that the growth in internal revenues will be no less than 10% in 2019. The share of mandatory expenses is very high at 82%, which limits the flexibility of budget expenses. The Region’s operating balance to regular revenues ratio will amount to 16% for the period from 2016–2019, which is lower than the medium level specified in ACRA methodology. In the above period, the capital expenses that are funded primarily out of the internal revenues will average to 13% of the total expenditures of the Region. 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, metals and fishing industries. The Region’s economy is affected by global prices for extracted minerals (in 2015–2017, apatite and nickel production generated an average of 15% of the Region’s GRP; according to ACRA's estimates, in 2018, the metals industry accounted for over 25% of the total industrial output of the Region). The Region's economy also depends on the pro-cyclical transport industry (10-12% of the GRP), including, in particular, the Murmansk commercial seaport, through which thermal coal is transshipped. According to ACRA's estimates for 2018, non-ferrous metal production accounted for about a fifth of the regional tax revenues. The public administration and defense sectors provide up to 16% of revenues. Other important industries include transportation and storage, and fishing industry.

Key assumptions

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

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:

  • Lower share of mandatory expenses in the budget;
  • 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 equal increase in revenues;
  • Substantial increase in the debt load caused by the need to cover 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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