Training on Forecasting, April 7–8

ACRA assigns ВВ+(RU) to the Republic of Mordovia, outlook Stable, and ВВ+(RU) to bond issues

The credit rating assigned to the Republic of Mordovia (the Republic) hinges on its low economic indicators, intensive growth of debt burden and low budgetary discipline. The rating is supported by low funding costs and a high share of investments in the GRP.

The Republic of Mordovia is a part of the Volga Federal District, bordering with five administrative entities of the Russian Federation. Its population amount to about 0.8 million people (which is 0.6% of the total Russia’s population, ranking 61st). In 2015, the Republic’s GRP amounted to RUB 187 billion (0.3% of the total GRP of Russian regions, ranking 66th).

Key rating assessment factors

 

The economy of the Republic is well-diversified, with a high potential for development, although the current specific indicators (GRP per capita, income per capita) are far below the national average. The structure of the regional economy is diversified: it is based on industrial enterprises (22.8% of GRP in 2015), agricultural sector (14% of GRP) and construction sector (11.7%). The employment by sector is fairly uniform: processing industry – 17.1%, agriculture sector – 20.2%, wholesale and retail sector – 13.9%. The share of any employer does not exceed 0.7% of the total number of employed. The share of investments in the GRP of the Republic is high (25% in 2016), which will be positive for the GRP in the forecast period from 2018 to 2020. At the same time, the Region’s GRP per capita and income per capita noticeably lag behind the national average.

Moderate budget self-sufficiency amid high capital expenditures leading to significant annual deficits. The Republic’s budget self-sufficiency is moderate: the share of own revenues was not more than 70% in 2014–2016. The share of excises (40% of the tax and non-tax revenues in 2016) exceeds proceeds from personal income tax or profit tax. At the same time, the mandatory expenditures will not exceed 58% in 2017, regardless the growth seen over the past three years. The capital expenditures of the Republic are consistently high (19% of expenditures on average), which caused a significant budget deficits and a significant debt increase in 2014–2017. The rating is also impacted by uncertainty about the actual budget deficit in 2017 (the target is 7% of the tax and non-tax revenues). The target will not be met unless budget revenues amount to RUB 7 billion from the sale of property (in 3Q2017, the actual revenues amounted to RUB 30 million). If the expenditures remain at the planned level, the budget deficit may amount up to 40% of the tax and non-tax revenues.

The intensive growth of the debt burden, caused by regular budget deficits, is offset by the low cost of debt. In 2013–2017, the debt grew by 60% to RUB 42.9 billion rubles. Such growth may continue in case of lower-than-planned revenues from sale of property in 2017, and, according to ACRA estimates, the debt may become as high as RUB 50 billion, provided that the budget expenditures remain unchanged.

The risk of fast debt growth is partially offset by the low cost of funding (about 50% of the debt is budgetary loans). The expected rescheduling of the Republic’s debt owed to the federal center for seven years will result in the postponement of 47% of the debt to the period beyond 2021 (provided that the Republic is able to comply with the terms of rescheduling with respect to the commercial debt).

The budget liquidity is supported by external funding sources. The Government of the Republic attracts, on a regular basis, short-term funding from the Federal Treasury, to the maximum allowable amount. In 2016, the Federal Treasury loans were borrowed six times for the total amount of RUB 2.1 billion. In 2017, the amount of such loans will be RUB 2.7 billion. The funds are used to reduce interest payments to creditor banks.

Key assumptions

  • GRP per capita growth up to 60% of the national average by 2018;
  • The 2018 operational balance at least 12%, capital expenditures at least 15% of the total budget expenditures;
  • Maintaining the debt burden at the level of 3Q2017.

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:

  • Outstripping growth of the industrial sector of the regional economy;
  • The share of budget revenues generated from income tax growing above 20% of the tax and non-tax revenues amid stable revenues from other types of income;
  • Budget loans restructuring and subsequent complying with the terms of such restructuring;
  • Decline in the debt burden (the debt to operating balance ratio at 4x).

A negative rating action may be prompted by:

  • A slowing down growth of the regional economy;
  • Declining shares of personal income tax and profit tax below 30% and 15%, respectively;
  • Declining operating balance below 8%;
  • Growing borrowings from market funding sources, with subsequent increase in the debt services costs.

Issue ratings

Credit rating rationale. The below listed bond issues by the Republic of Mordovia, in ACRA’s opinion, have the status of senior unsecured debt, with their credit ratings corresponding to the credit rating of the Republic of Mordovia.

Key issue properties

1)      RegS / ISIN: RU34001MOR0 / RU000A0JU8Q3

Issue volume / outstanding

RUB 3.0 bln / RUB 0.9 bln

Issue date / Repayment date

October 28, 2013 / October 22, 2018

 

2)      RegS / ISIN: RU34002MOR0 / RU000A0JVV49

Issue volume / outstanding

RUB 3.0 bln / RUB 2.4 bln

Issue date / Repayment date

October 21, 2015 / October 14, 2020

 

3)      RegS / ISIN: RU34003MOR0 / RU000A0JWSQ7

Issue volume / outstanding

RUB 5.0 bln / RUB 5.0 bln

Issue date / Repayment date

September 9, 2016 / September 3, 2021

Rating history

None.

Regulatory disclosure

The credit ratings have been assigned to the Republic of Mordovia and to bonds issued by the Republic of Mordovia (RU000A0JU8Q3, RU000A0JVV49, RU000A0JWSQ7) 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 Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied to assign credit ratings to the above issues.

The credit rating has been assigned to the Republic of Mordovia for the first time. The credit rating and credit rating outlook are expected to be revised within 182 days following the rating action (November 3, 2017).

The credit rating has been assigned to the bonds of the Republic of Mordovia (RU000A0JU8Q3, RU000A0JVV49, RU000A0JWSQ7) for the first time. The credit rating is expected to be revised within 182 days following the rating action (November 3, 2017).

The credit rating was assigned based on the data provided by the Republic of Mordovia, 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 Republic of Mordovia participated in its assignment.

No material discrepancies between the data provided and the data officially disclosed by the Republic of Mordovia in its financial report have been discovered.

ACRA provided no additional services to the Republic of Mordovia. No conflicts of interest were discovered in the course of credit rating assignment.

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