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

The credit rating of the Murmansk Region (hereinafter, the Region) is based on the Region’s low debt load, high budget self-sufficiency, and moderate internal budget liquidity. The budget’s substantial dependency on dominating sectors of the economy and an uneven debt repayment schedule limit the rating.

The 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. The Region is home to 0.5% of the Russian population and its GRP equals 0.6% of Russia’s total GRP. The Region’s GRP totaled RUB 536 bln in 2019.

Key rating assessment factors

Self-sufficient budget with a dependency on dominant industries. Given the actual figures for 2017−2019 and budget estimates for 2020−2021, ACRA expects that the averaged1 share of tax and non-tax revenues (TNTR) in the Region’s revenues (excluding subventions) will be about 87%. The actual and projected balance of current operations to current income varies over 2017−2021 from a maximum of 17% in 2019 to a minimum of -1% in 2020. The decrease is due to an expected decrease in TNTR in 2020 amid a high base last year, as well as a reduction in tax revenues caused by COVID-19 restrictions. However, for 7M 2020, the Region’s TNTR amounted to 97% compared to the same period last year.

The averaged share of capital expenditures in 2017−2021 should total 14%. The Region is able to finance most of its capital expenses with its own funds.

The Region’s 2020 budget law provides for a budget deficit at 12% of TNTR to be almost fully covered by attracting new debt. As a result, the debt load will return to its 2017 level, which should not affect the Region’s budget or debt profile assessments.

Given the current macroeconomic environment, ACRA believes that the Region’s tax revenues are likely to decline more substantially than the current version of the budget law indicates. In ACRA’s base case scenario, the decline in tax revenues in 2020 could equal up to 12% of actual revenue in 2019.

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

Low debt load and uneven debt repayment schedule. The projected debt to current income ratio for this year will be 33% and 37% for 2021. According to ACRA, debt to TNTR for this year will be within the parameters set in additional budget debt restructuring agreements.

As of September 1, 2020, the Region’s debt consisted of budget loans (60%), a loan from the Federal Treasury Department (36%), and guarantees (4%). The debt repayment schedule is uneven. This year, the Region will have to pay off (refinance) the Treasury loan. Sources of liquidity include revolving credit lines in banks. 

As of July 1, 2020, the regional budget had no overdue debt and the total debt of municipalities amounted to 11% of total TNTR.

The Region has enough liquidity to meet its debt obligations on time. Account balances cover less than half of the budgets averaged monthly expenses and about half of debt obligations due in 2020. Debt due this year may be refinanced in full using undisbursed credit lines with maturities of just over a year. The Region uses funds from the Federal Treasury Department as well as funds of autonomous and budgetary entities to manage its liquidity.

The Region’s economic development is tied to international market conditions. The Region’s economic performance is driven by global commodity prices (including apatite and nickel) as well as by a pro-cyclical transportation industry with Murmansk Commercial Seaport, the largest taxpayer, involved in the transshipment of thermal coal. According to ACRA, nonferrous metals (extraction and production) accounted for around 30% of total tax revenues in the Region’s budget. The public sector (including public administration and military security services) generated around 20% of tax revenues, with the transportation sector generating 8%. The Region’s GRP performance is moderate compared to other Russian regions and wages are comparatively high, averaging 3.6x above the minimum subsistence level.

Key assumptions

  • Reduced budget expenses to prevent further increase in debt load if the Region does not receive tax revenues in 2020;
  • Debt to current revenues below 35% in 2020.

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:

  • More evenly distributed debt repayment schedule;
  • Higher internal budget liquidity.

A negative rating action may be prompted by:

  • Decline in tax revenues by more than 12% in 2020 with the inability to cut budget expenses;
  • Debt to current revenues rising above 35%.

Issue ratings

No outstanding issues have been rated.

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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