Fitch Affirms City of Moscow at 'BBB'; Outlook Stable
December 21, 2012 Fitch Ratings
Fitch Ratings-London/Moscow/Barcelona-21 December 2012: Fitch Ratings has affirmed the Russian City of Moscow's Long-term foreign and local currency ratings at 'BBB' and Short-term foreign currency at 'F3'. The National Long-term rating is affirmed at 'AAA(rus)'. The Outlooks on the Long-term ratings are Stable.
The affirmation reflects Moscow's capital status, its robust wealth and economic indicators, sound budgetary performance, capex flexibility and strong debt ratios. The ratings also factor in potential expenditure pressure stemming from the city territorial expansion.
Fitch forecasts that the operating margin will slightly decline to 19.3% in 2012 from 22% in 2011 and will hover around 20% in 2013-2014. Despite a deterioration of the city's operating balance in 2009-2012 compared with pre-crisis actuals, Moscow has a sound financial position by international standards, reflecting the city's capacity to absorb shocks.
Moscow receives significant tax proceeds from the major national businesses that have their headquarters in the city. However, due to the large proportion of direct taxes in its budget, the city is vulnerable to negative economic shocks. New tax regulation regarding corporate income tax (CIT) payment by large consolidated taxpayers will also negatively affect the city's budget.
Fitch estimates Moscow's direct risk to decrease to about RUB187bn (13.5% of current revenue) by end-2012 from peak RUB295bn (26.6%) at end- 2010. The agency further expects the city to borrow on the capital market again in 2013. However, debt increase will be moderate and direct risk will remain below 16% of current revenue by 2015. The city has strong debt coverage relative to debt to current balance and an extended direct risk maturity profile to 2022. These factors, together with strong liquidity fully absorbing direct risk in 2011, underpin the sustainability of its financial position.
The city's recent territorial expansion will lead to considerable need for new infrastructure development and could cause future new borrowing. Moscow's area increased by 2.6x from 1 July 2012 and potential additional spending for the new territory will exceed the extra revenue proceeds given the low population density in the acquired area. However, this process will be spread over several years and will not have immediate negative impact to the city's budget.
Moscow directly and indirectly controls an extensive public sector. This involves additional contingent risk and puts pressure on the budget expenditure via administrative expenses and subsidies. The administration is making a significant effort to reduce the number of public companies and has privatised several shareholdings. Due to the large size of the city's budget, Fitch does not consider risk from the sector to be significant.
Moscow benefits from its status as the Russian capital and the economic and financial centre of the country. It has a strong, service-oriented economy and its population accounts for 8.1% of the national; it contributed about 22% of Russia's GDP in 2010. Per capita gross city product was 3x the national average in 2010, making the city one of the wealthiest regions in the country.
RATING OUTLOOK - STABLE
The ratings are constrained by the ratings of Russian Federation: The rating could be positively affected by a sovereign upgrade accompanied by continued sound budgetary performance, with the operating balance around 20% of operating revenue, and the debt coverage below the debt maturity profile.
Large, unforeseen expenditure would be negative: Unless the sovereign is downgraded, it is unlikely that Moscow would be downgraded. However, a downgrade could occur if the city's territorial expansion results in additional, large infrastructure needs and a fall in CIT receipts caused significant deterioration in Moscow's debt position and budgetary performance.
KEY ASSUMPTIONS AND SENSITIVITIES
The ratings are sensitive to a number of assumptions.
- Fitch assumes that negative effects on the revenue side stemming from recent changes in CIT allocation would be largely offset by tax base increase caused by continuous economic growth.
- Fitch also assumes that additional capital expenditure caused by Moscow's territorial expansion will not result in a sharp increase in Moscow's debt stock.
Company — Moscow
Full nameCity of Moscow