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ACRA affirms AA(RU) to the Moscow Region, outlook Stable, and AA(RU) to bond issues

The credit rating assigned to the Moscow Region (hereinafter, the Region) is determined by the high level of its economic development, stable budget indicators, average debt load, and a substantial amount of liquidity.

The Moscow Region is a large, industrially well-developed region characterized by its significant contribution to Russia’s economy (RUB 3.8 trillion in 2017, or 5% of the total GRP of Russia). The Region ranks second in the country by population (5% of the total).

Key rating assessment factors

Large-scale, self-financed capital investment program. The Region’s budget is characterized by a consistently large share of proprietary revenues (94% of budget revenues excluding subventions). For 2016-2019, mandatory expenses could average around 75% of total expenses while the operating balance should not exceed 20% of regular revenues. The average share of capital expenses could amount to 17% of the Region’s total expenses for this period. The Region is planning a substantial increase in capital investments in 2019 (1.8x more than in 2018). ACRA’s base case scenario expects the Region to execute these expenses at no lower than 80%. This planned increase in capital expenses along with the increase in mandatory expenses could lead to an increase in the Region’s budget deficit higher than RUB 100 bln in 2019 (compared to RUB 28.9 bln in 2018). According to the 2019 regional budget law, the Region will finance its deficit both with the funds of its own financial reserve, and by increasing commercial debt.

Average debt load coupled with the need to refinance three quarters of debt by 2021. According to ACRA’s base case scenario, the Region’s total debt in 2019 could amount to 200% of its operating balance, which corresponds to an average level of risk. However, the total debt may exceed 300% of the operating balance if the Region fully implements its current capital expense program and does not fulfill tax and non-tax revenues (TNTR) by 5% of the level stipulated by the budget law. As of the date of this analysis, the Region’s short-term debt amounted to 7% of total debt and turned out to be nine times less than the expected operating balance (excluding interest expenses), which corresponds to a minimum refinancing risk in 2019. In 2020-2021, this risk could increase greatly because of the Region’s need to refinance almost 70% of its debt (RUB 91 bln). Debt service expenses in 2019 should not exceed 20% of the operating balance, which corresponds to a low level of risk and indicates unhindered accessibility to these expenses. The public sector debt load remains moderate.

Substantial budget liquidity. The Region regularly places funds in deposits in amounts that allow it to cover expenses over the course of one-two months. As of April 1, 2019, funds placed by the Region in bank deposits amounted to around 55% of regional debt. Liquidity could decrease if the Region fully executes its capital expense program in 2019, as it will use a substantial part of its deposited funds. However, ACRA’s base case scenario indicates that the balance of funds will be sufficient to compensate for the mismatched seasonality of income and expenses, if necessary.

High economic diversification and advantageous location. Despite the historically high concentration of machine-building enterprises, the Region’s dominating industry is food processing (roughly 25% 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 (or a group of large taxpayers): historically, the largest share of one taxpayer in budget tax revenues is less than 4%.

Proximity to Moscow guarantees a stable selling market for goods manufactured in the Region and a demand for workforce, which ensures a low rate of unemployment (about 60% of the country average in 2015–2018) and a relatively high per capita income (30% higher than the country average in the analyzed period).

Key assumptions

  • Increase in TNTR by a minimum of 4.8% in 2019 (ACRA’s projected inflation rate) compared to 2018;
  • Counting part of the expenses for the completion of Urban Group’s residential projects as a part of mandatory expenses;
  • Execution of the planned capital expense program by 80% in 2019.

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:

  • Stabilized expected debt load;
  • Regional economy growing notably faster than the national average.

A negative rating action may be prompted by:

  • Growing mandatory expenses;
  • Budget deficit exceeding 5% for a long period;
  • A substantial reduction in the average market debt maturity.

Issue ratings

The Moscow Region, 35010 (ISIN RU000A0JX0B9); maturity date: November 21, 2023; issue volume: RUB 25 bln — AA(RU).

The Moscow Region, 34011 (ISIN RU000A0ZYML3); maturity date: December 22, 2022; issue volume: RUB 25 bln — AA(RU).

Rationale. The Agency believes that the above bonds issued by the Moscow Region have the status of senior unsecured debt. The credit ratings of these debt instruments correspond to the credit rating of the Moscow Region.

Regulatory disclosure

The credit ratings of the Moscow Region and the bonds (ISIN RU000A0JX0B9, ISIN RU000A0ZYML3) issued by the Moscow Region have 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. In the course of assigning a credit rating to the bond issues above, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation has also been used.

The credit ratings assigned to the Moscow Region and the bonds (ISIN RU000A0JX0B9, ISIN RU000A0ZYML3) issued by the Moscow Region were published by ACRA for the first time on December 12, 2016, December 12, 2016, and December 21, 2017, respectively. The credit rating of the Moscow Region and its outlook and the credit ratings of the bonds (ISIN RU000A0JX0B9, ISIN RU000A0ZYML3) issued by the Moscow Region are expected to be revised within 182 days following the publication date of this press release as per the Calendar of planned sovereign credit rating revisions and publications.

The above 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 Government of 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 Government of the Moscow Region. No conflicts of interest were discovered in the course of credit rating assignment.

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