Training on Forecasting September 17–18

ACRA affirms the Moscow Region’s credit rating at AA(RU), outlook Stable, and affirms bond issue credit rating

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 3.5 trillion in 2016, 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

High economic diversification. 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 (one large taxpayer group): as of end-2016, the largest share of one taxpayer made up only 3.4% of the budget’s 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. The above ensures a low unemployment level (58% of the country average in 2014-2017) and a relatively high level of per capita income (29% higher than the country average in the analyzed period).

Stable budget performance. The Region’s budget is characterized by a persistently large share of own revenues (91% of budget revenues net of subventions). Roughly 73% of total expenses represent mandatory spending, by virtue whereof the operating balance makes up only 24% of regular revenues (the average figure for 2014-2017 and according to forecast for 2017). The average share of capital expenditures is 16% in the analyzed period; due to high share of capital expenditures channeled into socially important industries the cost saving buffer is fairly thin (by ACRA’s estimates, it amounts to 2–3% of the Region’s total expenses).

Moderate debt load level coupled with a well-balanced debt structure. As of the date of the analysis, the Region’s long-term debt made up 97% of its total debt. Every year, the total debt slightly exceeds the operating balance amount. By ACRA’s estimates, in 2018-2019, the abovementioned ratio may more than double if the need arises to finance budget deficit by borrowings. However, even if budget indicators significantly deteriorate (own revenues show an annual 7% decrease of the target level), which is anticipated in ACRA’s stress scenario, the Region’s debt to operating balance ratio will stay in the positive zone.

Substantial volume of liabilities incurred by public sector enterprises. ACRA estimates that the fiscal and commercial indebtedness of enterprises owned by the Moscow Region, which can be repaid from the regional budget amounted to RUB 6.6 bln at year-end 2016 (6% of the Region’s outstanding plain debt as at year-end 2017).

Excessive budget liquidity. The Moscow Region regularly places funds on deposits, while having no past due loan debt. That said, its own liquidity volume would decrease if the deficit financing needs arise.

Key assumptions

  • Maintaining close-to-country-average economic growth rate;
  • Maintaining the share of mandatory expenses at up to 80% of total budget spending during the forecast period;
  • 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;
  • Partial non-fulfillment of the Region’s capital expenditure plan.

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;
  • Notable excess of the national-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 turnover throughout a year.

Issue ratings

ACRA assigns AA(RU) to:

The Moscow Region, 35010 (ISIN RU000A0JX0B9); redemption: November 21, 2023; issue volume: 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 ratings of the Moscow Region and bond 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 issue above, Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation has also been used.

For the first time, a credit rating has been assigned by ACRA to the Moscow Region on December 12, 2016. The credit rating of the Moscow Region and its outlook are expected to be revised within 182 days following the rating action date (December 7, 2017) as per the 2017-2018 Calendar of planned sovereign credit rating revisions and publications.

For the first time, a credit rating has been assigned by ACRA to government bonds of the Moscow Region on December 12, 2016. The credit rating is expected to be revised within 182 days following the rating action date (December 7, 2017) as per the 2017-2018 Calendar of planned sovereign credit rating revisions and publications.

The assigned and affirmed 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 and affirmation.

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 and affirmation.

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