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Fitch Affirms Moscow Region at 'BB+'; Outlook Stable

October 26, 2015 Cbonds
Fitch Ratings has affirmed the Moscow Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB+' with Stable Outlooks and its Short-term foreign currency IDR at 'B'. The agency has also affirmed the region's National Long-term rating at 'AA(rus)' with a Stable Outlook.

The affirmation reflects Fitch's unchanged baseline scenario regarding Moscow region's stable budgetary performance, strong self-financing capacity and low debt.

The ratings reflect the region's satisfactory operating performance, low debt, strong liquidity and wealth and economic indicators that are above the national median. The ratings also factor in a weak institutional framework and an extensive public sector that exposes the region's budget to large contingent liabilities.

Fitch projects the region's operating balance to consolidate at 8% of operating revenue over the medium term, in line with 2014 performance. We do not expect operating margin to recover to its historically high 17% in 2011-2013 due to stagnating tax revenue and on-going pressure on operating expenditure, which are mostly socially-oriented. Its operating balance should remain sufficient to cover interest payments and maturing debt in 2015-2016.

Fitch forecasts Moscow Region to record a deficit before debt variation of 5% of total revenue (2014: 1.5%) as the region continues its investment in infrastructure and maintains capex at an average 15% of total expenditure in 2015-2017 (2014: 14%). A significant 95% of the capex will be funded by the region's strong current balance, capital transfers from the federal budget and cash balance.

Fitch expects direct risk to stabilise at about 30% of current revenue (2014: 30.5%) over the medium term, supported by the region's strong self-financing capacity. At end-September 2015, debt composed of RUB64bn three- to five-year bank loans and RUB33bn budget loans due in 2015-2034.

Refinancing needs are concentrated in 2017-2018 when about 80% of direct risk will mature. Fitch does not expect Moscow Region to have any issues with refinancing its maturing debt due to its low levels of debt and the region's sound access to bank loans through Sberbank of Russia (BBB-/Negative/F3).

Fitch takes a positive view of the region's sound RUB94bn cash balance as of end-September 2015. The region places its temporary available liquidity in bank deposits and earns additional interest for the budget (9M15: RUB5.4bn). Fitch projects the region's cash balance to be depleted by capex at end-2015 but to remain sound at RUB40bn.

Moscow Region directly and indirectly controls an extensive public sector, consisting of more than 100 companies. This puts pressure on budget expenditure through administrative expenses and subsidies. However, Fitch does not consider risk from the sector to be significant due to the large size of the region's budget and prudent debt management.

The region has a well-diversified economy based on services and processing industries. The region's proximity to the City of Moscow supports its wealth and economic indicators being above the national median. In 2013, GRP per capita was 37% above the national median and in December 2014 average salary was 54% over the national median. Fitch forecasts 4% contraction of national GDP in 2015, and expects the region to also face a slowdown of activity although its economic indicators should remain strong.

Sharp growth of direct risk to above 50% of current revenue, coupled with deterioration of operating performance resulting in weak debt coverage, could lead to a downgrade.

Restoration of the operating margin to the historical high of above 15%, accompanied by sound debt metrics with direct risk-to-current balance (2014: 4.7 years) below the weighted average debt maturity profile (2014: three years) accompanied by a Russian economic recovery, could lead to an upgrade.
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    Moscow region Government
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