Fitch Affirms Russian City of Moscow at 'BBB-'; Outlook Stable
25 Nov 2016 12:10 PM
Fitch Ratings-Moscow/London-25 November 2016: Fitch Ratings has affirmed the City of Moscow's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB-' with Stable Outlooks, Short-Term Foreign Currency IDR at 'F3' and National Long-Term rating at 'AAA(rus)' with a Stable Outlook. Moscow's outstanding senior unsecured debt has also been affirmed at 'BBB-' and 'AAA(rus)'.
The affirmation reflects Fitch's unchanged base case scenario regarding Moscow's strong budgetary performance and low direct risk over the medium term.
KEY RATING DRIVERS
Moscow records robust wealth and economic indicators, sound budgetary performance, high capex flexibility and strong debt ratios. Moscow's ratings are constrained by Russia's ratings (BBB-/Stable).
Moscow benefits from its status as the Russian capital and the country's economic and financial centre. It has a strong, service-oriented economy and contributed 21.8% of Russia's GRP in 2014 (the latest available data). Per capita gross city product was 2.6x the national average in 2014, making the city one of the wealthiest subnationals in the country.
Fitch expects that Moscow will continue to record a strong operating margin of 20%-22% in 2016-2018, in line with the historical average. Moscow has maintained a high self-financing capacity, with capital expenditure covered 1.2x by the current balance in 2015. The city has high expenditure flexibility, which underpin its capacity to absorb revenue shocks.
Moscow receives significant tax proceeds from major national businesses headquartered in the city. Taxes represented 90.5% of the city's 2015 operating revenue, driven by corporate and personal income taxes, which comprised 84% of tax proceeds. During the last three years, the administration has made some efforts to increase fees, fines and other non-tax operating revenue. We expect the proportion of these revenues could grow up to 10% of operating revenue in the medium term.
For 10M16 the city collected close to 80% of full-year budgeted revenue and only 61.1% of expenditure, leading to an interim RUB207bn surplus. However, this surplus largely reflects the delayed expenditure, and we expect higher spending over 4Q to result in a modest full-year deficit of RUB3.2bn, equivalent of 0.2% of full-year revenue (2015: RUB144bn surplus).
Moscow's direct risk is low by both national and international standards. Fitch projects the city's direct risk will reduce to RUB66.3bn, or 4% of current revenue by end-2016 (2015: 8.9%) and will not exceed 10% in the medium term.
As of 1 November, direct risk mostly comprised domestic bond issues and accounted for RUB69.8bn. Moscow has gradually reduced its debt since 2010 when it peaked at RUB294.8bn (26.6% of current revenue). In 2016, the city has repaid RUB38bn domestic bonds and EUR407m (equivalent to RUB28bn at 20 October 2016, the repayment date) Eurobonds, which led to elimination of the city's FX exposure. The city does not have any plan to borrow in foreign currency.
Moscow needs to repay RUB26.1bn in 2017, which is fully covered by a strong cash balance (Fitch projects outstanding cash will account for RUB192bn by end-2016). We expect that Moscow could borrow up to RUB60bn in the domestic market next year to refinance maturing liabilities and cover fiscal deficit, which we expect to reach RUB28bn in 2017. This will lead to the city's direct risk growing to about RUB100bn at end-2017, but this remains very low relative to current revenue.
The city directly and indirectly controls a large number of public-sector companies. This puts pressure on budget expenditure via administrative expenses and subsidies. Fitch does not consider risk from the sector to be significant, due to the large size of the city's budget. The administration is making a significant and, so far, successful effort to reduce the number of public companies by having privatised several large shareholdings during the last three years.
The city's strong intrinsic credit profile remains constrained by the weak institutional framework for local and regional governments (LRGs) in Russia. Frequent reallocation of revenue and expenditure responsibilities between the tiers of government hampers the forecasting ability for Russian LRGs.
Fitch considers the City of Moscow's ratings as constrained by the sovereign ratings, so any rating action on the Russian Federation's IDRs would lead to rating action on Moscow.
A downgrade is unlikely due to the city's intrinsic strength, unless the sovereign is downgraded. However, a consistent material deterioration of the city's budgetary performance and debt metrics would be negative for the city's ratings.
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Fitch has made a number of adjustments to the official accounts in order to make the LRG comparable internationally for analyses purposes. For the City of Moscow these adjustments include:
- Transfers received of capital nature were re-classified from operating revenue to capital revenue.
Additional information is available on www.fitchratings.com
International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016)
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