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Rating Action:

Moody's affirms Eurasian Development Bank's Baa1 rating; maintains stable outlook

27 Apr 2021

Singapore, April 27, 2021 -- Moody's Investors Service, ("Moody's") has today affirmed the Eurasian Development Bank's (EDB) Baa1 long-term and P-2 short-term issuer ratings, and maintained the stable outlook. Moody's has also affirmed EDB's Baa1 foreign currency senior unsecured debt rating, as well as its (P)Baa1 foreign currency senior unsecured medium-term note programme rating.

The rating affirmation is supported by Moody's assessment that EDB's solid capital adequacy and liquidity positions compared to peers will continue to underpin its Baa1 rating. At the same time, these strengths are balanced against the bank's funding constraints because of the reliance on its two large regional markets, as well as concentration risk given the relatively tight economic linkages between members and their shared exposure to the commodities market.

The stable outlook reflects Moody's view that risks to the credit profile are broadly balanced. In particular, while EDB has put some measures in place to enhance its risk management framework and its asset performance and credit metrics have remained strong since the onset of the pandemic, the pandemic's effects may only be felt over time and credit conditions may weaken once some of the economic support measures provided by the respective governments in the countries the bank operates in are unwound.

RATINGS RATIONALE

RATIONALE FOR THE RATING AFFIRMATION

EDB's Baa1 rating balances its solid capital and liquidity positions against the weaker quality of funding compared to peers because of its reliance on the Russian ruble and Kazakhstani tenge markets primarily, and the concentrated exposure of its loan portfolio and member support to fluctuations in the commodities market.

Moody's expects EDB's capital and liquidity positions to remain strong in comparison with peers, which underpins its intrinsic financial strength. The bank's leverage ratio -- which Moody's calculate as the ratio of development-related assets (DRA) plus liquid assets rated A3 and below to usable equity -- rose further in 2020 to 1.9x from 1.5x the year before, but remains below the median of 3.5x for similarly rated peers. Likewise, EDB's availability of liquid resources -- which Moody's measures using the ratio of liquid assets rated A2 and above to projected net cash outflows over the following 18 months -- stood at slightly more than 200% as of the end of 2020, compared to 84% for peers. Moody's expects EDB's leverage ratio to remain at around current levels by the end of this year, while the availability of liquid resources will decline but likely remain above 100%, as the bank uses its large liquidity buffer to finance 2021 projects.

EDB's enhancements to risk management following the large regional shock over 2014-16 have helped support improved asset performance. The key enhancements include minimising currency risk in projects, ensuring riskier projects benefitted from guarantees, participating more actively in public-private partnership projects, and adopting globally accepted accounting standards (IFRS 9) to better assess and provision against credit risk. In project selection, EDB targets projects with stable and predictable cash flows, that receive state support including in subsidies or tariff setting, and/or that are at the low end of the cost curve globally. That said, while EDB's non-performing asset to DRA ratio remained low at around 1.4% as of the end of 2020, Moody's expects the impact of the coronavirus pandemic on asset performance to become evident for multilateral development banks only over the coming quarters. The effectiveness of EDB's enhanced risk management framework may therefore be tested.

Balanced against these credit strengths are EDB's still relatively weak quality of funding given the still limited currency diversification in sources of funding. EDB mainly finances its operations in ruble and tenge -- which together account for at least two-thirds of financing over the past two years -- and has a limited presence in international markets in hard currencies such as the dollar and euros. In Moody's view, EDB's regional funding markets are more susceptible to reversals in risk sentiment, raising volatility, and risk premia. Funding costs tend to be higher as a result. The bank recently issued a EUR300 million Eurobond and aims to increase its presence in international bond markets. If this strategy proves effective, it would widen EDB's sources of funding and improve its quality.

Economic linkages between EDB's members and their shared exposure to commodities markets also constrain its lending operations and member support. Russia and Kazakhstan -- which account for 99% of EDB's ownership and around two-thirds of lending -- are particularly exposed to the oil and gas sector (oil and gas account for 20-35% of government revenue and 50-70% of exports in both countries). A sharp decline in oil prices would weaken the economy and government finances in both countries, which would in turn raise risks to asset quality and performance and reduce the ability of the two governments to provide financial support. Moreover, the other, smaller members -- Armenia, Belarus, Kyrgyz Republic and Tajikistan -- are linked to these two large members, particularly Russia, through demand for their exports, remittances, and direct investment. Any economic weakness in Russia is likely to have negative spillover effects on these other members.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's view that risks are broadly balanced.

EDB's asset performance and credit metrics were still strong as of the end of 2020, partly underpinned by the recent improvements to risk management. Further evidence that asset performance is preserved would be a sign of potentially greater credit strength than Moody's currently assesses. However, the economic uncertainty stemming from the pandemic combined with fresh US sanctions and the ongoing threat of further sanctions on Russia, pose some downside risks to EDB's asset performance and balance sheet. Moreover, credit conditions may weaken once some of the economic support measures provided by governments in the EAEU are unwound.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Environmental considerations are material to EDB's rating. The bank has some direct exposure to the hydrocarbon sector through its projects, while its two largest shareholders are also exposed to carbon transition risks. That said, EDB has continued to increase the proportion of sustainable projects, with renewable projects accounting for the largest share within its energy portfolio. The bank also monitors the environmental impact of all its projects, as well as member countries' implementation of corresponding environmental action plans in relation to funded projects.

Social considerations are not material to EDB's rating. The bank's social responsibility policy establishes incentives for member countries to implement social risk management systems within projects, which helps limit portfolio exposure to social risks. Moody's regards the coronavirus pandemic as a social risk under its ESG framework, given the substantial implications for public health and safety, which may have an impact on the EDB through its effect on member states.

Governance considerations are material to EDB's rating. The EDB continues to strengthen its risk management practices, works with other development banks with solid governance standards, and has a structured selection criteria for the funding of projects.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Upward pressure on the rating would likely stem from a longer track record of effective risk management that supported asset performance. Such developments would point to underlying improvements in governance and risk-management practices. An increased diversity of funding sources, including access to deeper funding markets, would also likely put upward pressure on the rating. Significant improvements in the credit profiles of the bank's major borrowers or shareholders, and/or a reduction in economic and financial linkages between members that offered greater diversification to the bank's operations albeit more likely over the longer term, would additionally be credit positive.

Downward pressure on the rating would arise if EDB's capital adequacy, asset performance and/or liquidity position were to significantly deteriorate, indicating weaknesses in risk and liquidity management that Moody's does not currently incorporate. A significant weakening of the credit profiles of the bank's major borrowers or shareholders would also be credit negative.

The principal methodology used in these ratings was Multilateral Development Banks and Other Supranational Entities Methodology published in October 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1232238. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Christian Fang
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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