Moody's affirms Russia's govt bond rating at Baa1, outlook stable
FRANKFURT. March 28 (Interfax) - International ratings agency Moody's Investors Service has affirmed Russia's Baa1 government bond rating and stable outlook given the country's continued balance of strengths and challenges, the agency said in a press release.
According to Moody's, the strengths underpinning Russia's sovereign rating and outlook are the strong fiscal and external debt metrics compared to other countries in the same rating category, as well as the improvements in Russia's monetary policy framework further to the introduction of a more flexible exchange-rate regime and a move towards inflation-targeting.
However, the press release said, these strengths are counterbalanced by Russia's increased susceptibility to event risk in light of its lower post-crisis growth potential and weaker fiscal position, given that both of these factors reduce the country's ability to absorb potential shocks, such as a prolonged decline in oil prices.
Moody's decision to affirm Russia's Baa1 government bond rating is underpinned by the country's relatively strong fiscal and external metrics and the increase in exchange-rate flexibility. In particular, Russia benefits from credit-supportive elements in relation to countries in the same rating category such as its low general government debt (at around 13% of GDP in 2012), a mostly balanced general government budget in the coming years and very low debt-service costs which were at around 1.5% of general government revenues in 2012. These factors also account for the stable rating outlook on Russia's sovereign debt rating. Russia's rating is also supported by a comparatively moderate level of total external debt (31% of GDP in 2012) and continued, albeit declining, current account surpluses, as well as the country's significant foreign-exchange reserves, which -- when including the country's Reserve Fund and National Welfare Fund -- stood at around $475 billion as of March 2013, or 23.5% of 2012 GDP, Moody's reported.
In addition, the increasing exchange-rate flexibility mitigates the impact of current oil price fluctuations on the Russian economy.
Alongside the introduction of the country's new exchange-rate framework, the Central Bank of Russia has also improved the monetary transmission mechanism and is preparing for the adoption of inflation-targeting measures. Moody's also views positively the recently improved access of non-residents to the Russian sovereign bond market, which should help raise the traditionally scarce long-term funding, and over time also increase the attractiveness of corporate borrowers. Furthermore, Moody's considers the introduction of the new fiscal rule as positive in comparison to the status quo of full fiscal discretion following the abolition of the previous fiscal target related to the non-oil fiscal balance in 2009, the press release said.
However, Moody's points out that these positive factors are counterbalanced by the country's lower post-crisis growth potential, which is constrained by a weak rule of law and high corruption levels, as well as by stagnating oil production and challenges in the gas sector. In Moody's opinion, the country's weak institutions are exacerbating the government's challenges to attract sufficient levels of investment capital to replace aging infrastructure; develop economic bases such as manufacturing and services sectors; and ultimately increase Russia's potential growth rate. While Moody's expects oil prices to stabilize at a high level, Russia's oil production is flat and may even decline in the coming years. The gas sector faces a different situation, with gas production likely to continue increasing but demand and prices remaining under pressure given technological changes in the extraction of shale gas and liquefied natural gas, the press release said.
Furthermore, Moody's observes that Russia's fiscal position has weakened following the crisis and that the country's creditworthiness continues to be weighed down by slow pace of fiscal consolidation and the weak outlook for a timely replenishment of Russia's fiscal buffer. The fiscal stimulus that the government provided in 2009 and 2010 has become entrenched, as reflected in the non-oil deficit of around 10% -- significantly above the suspended pre-crisis target of 4.7% of GDP. Furthermore, the government's Reserve Fund is below pre-crisis levels, having contracted to 3% of GDP in 2012 from 9.7% in 2007, and the likelihood of the fund's replenishment to a comfortable level is uncertain. This raises concerns given that the oil price level that is needed to balance Russia's budget has risen to over $100 from around $30 in 2007, thereby increasing the vulnerability of the country's budget to falling oil prices. In addition, Russia faces additional medium-term fiscal challenges due to age-related costs created by a dwindling working-age population, Moody's reported.
Moody's says that upward pressure on Russia's sovereign ratings is unlikely to emerge without significant measures designed to improve institutional strength, render the public sector more efficient, reduce levels of corruption and bring about a more consistent enforcement of the rule of law. The rating agency would also view positively a substantially increased economic diversification with the aim of reducing the economic volatility that stems from Russia's dependence on commodity output and exports, the press release said.
Conversely, Moody's says that the Russian government's bond ratings would come under downward pressure in the event of a multi-year period of low commodity prices, combined with an increased susceptibility of fiscal metrics to oil price shocks. The ratings could also come under pressure from a material deterioration of the government's net worth (higher debt, lower assets), since this would erode its main advantage over similarly rated governments characterized by more robust institutional strength. In absence of significant measures designed to improve institutional strength and to foster economic diversification, the medium- to long-term challenges including a lack of investment are expected to exert increasingly downward pressure on Russia's rating, the press release said.
In a related action, Moody's has affirmed Russia's foreign-currency bond ceiling at A2, the foreign-currency deposit ceiling at Baa1, and the local-currency bond and deposit ceilings at A1. The country risk ceiling reflects all country risks -- including economic, financial, political and legal -- which, taken together, constrain local-currency ratings of domiciled obligors or locally originated structured transactions. The foreign-currency bond ceiling reflects the risk that the government imposes a debt moratorium in the event of a default. The foreign-currency deposit ceiling reflects the risk that the government freezes foreign-currency deposits to conserve scarce foreign-currency resources during a crisis, the press release said.
