The credit rating assigned to the Moscow Region (hereinafter – the Region) is determined by the high level of its economic development, stable budget indicators, and a well-balanced debt load, coupled with moderate risks of the broader public sector enterprises and plannable intra-year growth of debt financing and debt settlement turnover.
The Moscow Region is a large, industrially well-developed region characterized by its significant contribution to Russia’s economy (RUB 2.7 bln in 2014, or 5% or the total RF gross regional product, GRP). The Region ranks second in the country by population (5% of total).
Key rating assessment factors
High economic diversification. Despite the historically high concentration of machine-building enterprises, the Region’s dominating industry is food-processing (roughly 26% 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 (one large taxpayer group): ten large taxpayers that represent various economic sectors make up not more than 10% of the its total tax proceeds.
Geographical advantage. Proximity to Moscow guarantees a stable selling market for goods manufactured in the Region and a stable demand for workforce, which ensures a low unemployment level (94% of the country average) and a relatively high level of per capita income (26% higher than the country average).
Stable budget performance. The Region’s budget is characterized by a persistently large share of own revenues (about 89% of budget revenues net of subventions). The growth of tax proceeds will be correlated with the economic growth rate, since the potential for extensive growth at the expense of upping local tax rates has been fully exhausted. The operating balance is under pressure from the substantially large volume of mandatory expenses (approximately 73% of total expenses); the cost saving buffer is fairly thin (by ACRA’s estimates, it amounts to 3% of the Region’s total expenses) due to a large share of capital expenses being channeled into socially important industries.
Moderate debt load level coupled with a well-balanced debt structure. As of the current date, the Region’s long-term debt makes up 80% of its total debt. Every year, debt slightly exceeds the Region’s operating balance. By ACRA’s estimates, the value of this indicator will remain on a safe level (up to 1.5), provided that the Region adheres to its current debt management strategy (that total debt does not exceed 30% of own revenues). The volume of the Region’s interest expenses is insignificant. In 2013–2015, the Moscow Region had funds sufficient for repaying its outstanding debt. If in 2016, the Region reaches its target value of intra-year debt financing, its operating balance net of interest expenses will not be sufficient to repay the debt maturing in 2016, which ACRA regards as a stress scenario of refinancing risk materialization.
Substantial volume of liabilities incurred by public sector enterprises. ACRA estimates that the fiscal and commercial indebtedness of enterprises located in the Moscow Region, which can be repaid from the regional budget amounted to RUB 6.5 bln at year-end 2015 (7% of outstanding plain debt).
Excessive budget liquidity. The Moscow Region regularly places funds on deposits and has no past due loan debt. That said, its own liquidity volume can decrease given the need of deficit financing.
Key assumptions
- Maintaining moderately higher-than-country-average economic growth rate.
- Maintaining the share of mandatory expenses at 70% of total budget spending;
- Possibility of settling a portion of public sector enterprises debt from the regional budget;
- Maintaining the current debt portfolio maturity structure;
- Conservative debt management approach that accounts for the market environment.
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:
- Improvement of public sector enterprises’ financial standings;
- Notably exceeding the country-average economic growth rate.
A negative rating action may be prompted by:
- Growth of mandatory expenses;
- Increased cost of short-term funding coupled with significant intra-year turnover.
Issue ratings
ACRA assigns AA(RU) to:
The Moscow Region, 35010 (ISIN RU000A0JX0B9); maturity date 21.11.2023; RUB 25 bln.
Rationale. The Agency believes that bond issued by the Moscow Region has a status of senior unsecured debt. Credit rating of this debt instrument corresponds to the credit rating of the Moscow Region.
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, Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities, and the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments Under the National Scale of the Russian Federation.
A credit rating has been assigned to the Moscow Region for the first time. The credit rating and its outlook are expected to be revised within 182 days following the rating action (December 8, 2016).
A credit rating has been assigned to the bond of the Moscow Region for the first time. The credit rating and its outlook are expected to be revised within 182 days following the rating action (December 9, 2016).
The assigned credit ratings are based on the data provided by the Moscow 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 ratings are solicited, and 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 Moscow Region. No conflicts of interest were discovered in the course of credit rating assignment.
