Moody's changes Bashkortostan's Ba1 outlook to positive
MOSCOW. June 20 (Interfax) - Moody's Investors Service has changed the outlook of the Russian internal Republic of Bashkortostan's global-scale foreign and local-currency Ba1 issuer ratings to positive from stable, the agency said in a press release.
The outlook change reflects Moody's assessment of Bashkortostan's (i) strong liquidity profile; (ii) solid (albeit volatile) self-financing capacity; and (iii) modest debt burden, with very low debt-service requirements. These positive rating factors all stem from the republic's conservative approach to budget management, historically maintained by the regional government.
"Bashkortostan has demonstrated its ability to maintain a very high liquidity position of around 40% to operating revenue, despite fluctuations in the tax revenue stream in 2009-10. Bashkortostan's liquidity profile is the strongest amongst Russian sub-sovereign peers in relative terms and we expect that it will remain so in the medium term. Although the liquidity cushion is likely to partly decrease, we don't anticipate any detrimental effect on the region's credit quality," says Alexander Proklov, a Moody's Vice President, senior analyst and lead analyst for Bashkortostan Republic.
"We expect the region's debt position relative to operating revenue to remain at low double-digit levels over the next three years. Its amortisation profile is smooth and at present there are no material refinancing risks, whilst interest costs are low at 0.3-0.4% of operating revenue," said Proklov.
Moody's notes that the improving relationships between the republic and the federal government -- following the recent changes in the republic's top officials -- may facilitate additional federal ongoing support. In addition, the new republic government's recent efforts to attract private investment in the regional economy may promote further enhancements in the tax base. Moody's understands that the positive outcome of these developments may become visible in the medium term.
The ratings remain constrained by a persisting (albeit decreasing) dependence on key taxpayers concentrated in the oil-related industries.
"This factor adds volatility to the republic's tax revenue stream, which was almost flat in 2009-10, after four years of strong double-digit growth. Following the flat operating revenue dynamics and inflationary growth in key spending items, the republic's operating balances weakened during past two years. Going forward we expect operating margins to strengthen thanks to recovery in tax revenue, which will provide a basis for further, possible positive adjustments in the rating," said Proklov.
Additional pressure was exerted on the region's budget due to rigidity in key spending items -- particularly in salaries, social benefits and utility payments -- coupled with a necessity to develop the regional infrastructure and to support some local enterprises, particularly in the agricultural sector. "Nonetheless, Moody's positive outlook on Bashkortostan's ratings reflect our expectation that a conservative and thorough budgetary policy will be pursued by the regional government, leading to stronger operating and financing results going forward," said Proklov.
In Moody's view, a rating upgrade may follow the anticipated improvement in the gross operating balance to 15-17% of operating revenue, if this improvement is coupled with stable liquidity and debt positions. However, the outlook may stabilize in case of a rapid depletion of the liquidity cushion combined with a decrease in the region's self-financing capacity.
The Republic of Bashkortostan is one of the highly industrialised regions in Russia. The republic's population of 4 million accounts for 2.9% of the Russian total. The republic's Gross Regional Product (GRP) accounts for approximately 2.1% of the national GDP, while its GRP per capita on PPP basis is around 75% of the national indicator. Key components of the regional GRP are industrial output, broad trade and services sector, construction and agriculture.