S&P affirms Bashkortostan rating, outlook stable
MOSCOW. Nov 1 (Interfax) - Standard & Poor's Ratings Services has affirmed its 'BBB-' long-term issuer credit rating on the Russian Republic of Bashkortostan, the agency said in a pres release.
The outlook is stable.
"The ratings on Bashkortostan reflect its very positive liquidity position, low debt, moderately strong operating performance underpinned by its commitment to conservative spending, and modest contingent liabilities," S&P said.
"The ratings are constrained by our view of Russia's 'developing and unbalanced' institutional framework, which leads to low budget predictability and limited financial flexibility. We also factor in our view of financial management, although relatively prudent in the Russian environment, as 'negative' for Bashkortostan's creditworthiness in a global context. Other constraints include the economy's concentration in the oil-processing industry and only modest wealth in an international context.
The predictability of Bashkortostan's financial position remains constrained by federal controls over revenues and expenditures, which limits revenue and spending flexibility, and the evolving nature of Russia's 'developing and unbalanced' institutional framework. Furthermore, the major tax contributors to the regional budget are concentrated in the oil and oil-processing industry. A few large oil-related taxpayers and their subsidiaries contributed about 20% of Bashkortostan's consolidated budget tax revenues in 2010-2012. These contributions remain volatile, leaving the republic exposed to the policies of large taxpayers and swings in the economic environment.
Wealth levels remain modest. Bashkortostan's gross regional product (GRP) per capita was just above $8,000 in 2012, which is markedly lower than the national average.
Nevertheless, Bashkortostan's economy grew at an estimated 5% in 2012, which is above the national average. We expect GRP growth in Bashkortostan to exceed the Russian average in 2013-2015, helping to increase revenues and offset spending pressures.
We view the republic's financial management as negative in the global context, largely due to rudimentary long-term planning and limited oversight of its government-related entities (GREs). Nevertheless, we believe that the republic's management is prudent in the Russian context, and we expect the republic will continue its tight control over expenditures, debt, and
liquidity. We therefore expect Bashkortostan will maintain moderately sound budgetary performance, even despite growing pressure from the need to increase spending on public sector salaries and maintain and develop infrastructure. We project that operating margins will be constrained by federal mandates to increase civil servants' pay without adequate matching grants, but to stay near 9% of operating revenues in 2013-2015 compared with 12% on average in 2010-2012. Our base case includes an estimate of modest 5%-6% deficits after capital accounts in 2013-2015 on average after a 5% average in 2010-2012, as we understand that the republic is committed to keeping overall deficits modest. After the sale of stakes in gas pipelines for Russian ruble (RUB) 12 billion in 2013, which bolstered performance, the republic still has substantial assets that we estimate are worth much more than 20% of budget revenues and provide additional capital revenue flexibility. We therefore expect Bashkortostan's tax-supported debt to stay low, within 30% of consolidated operating revenues until 2015 under our base-case scenario.
The republic's contingent liabilities are "modest" in our view.
We consider Bashkortostan's liquidity position to be "very positive" thanks to its high cash reserves and robust internal cash flow-generating capability, which mitigates the republic's "limited" access to external liquidity. Bashkortostan is currently a net creditor, and we expect it to remain so until the end of 2014. Even though our base-case scenario factors in a likely gradual decrease in Bashkortostan's reserves, we assume that the republic will maintain cash above RUB20 billion over 2013-2015. This is much greater than our estimate for the republic's annual debt service.
As of Oct. 1, 2013, Bashkortostan's reserves represented about 30% of its projected 2013 operating expenditures, exceeding direct debt by more than 3x. The allocation of a portion of deposits, within the framework of Russian legislation, to banks rated lower than the republic itself exposes it to counterparty risk. But even after we apply deductions to reflect those risks, as per our methodology, the republic remains a net creditor.
We view Bashkortostan's access to external liquidity as 'limited,' as is the case for most Russian local and regional governments, given the weaknesses of the domestic capital market, to which we assign a Banking Industry Country Risk Assessment score of '7', with '1' being the lowest risk and '10' being the highest.
However, this is offset by robust internal cash flow generation capacity, based on our expectation of operating surpluses exceeding debt service more than twofold in the next two years over our forecast horizon.
The stable outlook reflects our view that, by continuing to apply prudent spending policies, Bashkortostan will contain expenditure pressure and consolidate its solid financial performance with deficits after capital accounts within 7%-8% under our base-case scenario. Accordingly, we believe that the republic will maintain high cash reserves of more than RUB20 billion, well exceeding annual debt repayment and deficits after capital accounts in 2014-2015.
We could raise the rating on Bashkortostan in the next 24 months if it implements even more prudent spending policies in the medium term, and especially if it institutionalizes its current conservative reserve and liquidity strategy.
Additionally, we would view positively for the rating if the republic maintained higher-than-expected reserves, structurally above 20%-25% of operating spending, and achieved stronger financial performance, with deficits after capital accounts declining to 2%-4% in 2014-2015 (likely via very conservative spending policies). We do not consider these scenarios very realistic, though, due to expenditure pressures.
We would take a negative rating action if the republic's performance deteriorated over 2014-2015. A deterioration would include operating surpluses at roughly 5% and debt service below 2x, and deficits after capital accounts widening and leading to a depletion of cash reserves below expected levels.
