New York, April 22, 2016 -- Moody's Investors Service today confirmed Russia's Ba1 government
bond and issuer ratings, concluding the review for downgrade that
was initiated on 4 March 2016, and assigned a negative rating outlook.
The key drivers for the decision to confirm Russia's rating at Ba1
are the following:
1. The economy has exhibited resilience to the renewed drop in
oil prices early this year thanks to an effective blend of macro policy
responses.
2. The fiscal adjustment underway appears sufficient to reduce
the 2016-18 deficits to a level that can be financed in the domestic
capital markets and through fiscal reserve drawdowns.
The negative outlook reflects the likely further erosion of the government's
fiscal savings in the context of Moody's medium-term projections
for oil prices. Moreover, a set of policies that would address
the economy's low growth potential has been slow to emerge,
while the election calendar over the next two years will likely interfere
with the implementation of politically unpopular reforms that could achieve
a more fundamental budget consolidation.
Russia's country ceilings, which include its Ba1/NP country
ceilings for foreign currency debt, its Ba2 country ceiling for
foreign currency deposits and its Baa3 country ceiling for local currency
debt and deposits, remain unchanged.
RATINGS RATIONALE
RATIONALE FOR CONFIRMATION OF RUSSIA'S Ba1 GOVERNMENT RATING
FIRST DRIVER -- EFFECTIVE MACRO POLICY RESPONSES AFFORD RESILIENCE
TO RENEWED DROP IN OIL PRICES
The first driver for Moody's decision to confirm Russia's
current Ba1 rating relates to the economy's demonstrated resilience
to the renewed drop in oil prices, which has been facilitated by
exchange rate flexibility and the authorities' additional fiscal
adjustments. The new oil price fall did not add lasting headwinds
to the economy, inflation or financial stability, with growth
taking only a brief and quite mild additional hit. While the ruble
initially depreciated by around 15% in January when oil prices
dropped, it has since strengthened in line with the subsequent recovery
in oil prices and declining inflation, leading to limited economic
disruption.
Another sign of the economy's resilience is that inflation continued
to fall despite the temporary fall in the exchange rate. Year-on-year
inflation subsided to 7.3% in March -- compared to
12.9% at the end of 2015 -- mainly owing to base effects
from the same period of 2015. We expect end-year inflation
to be around the same level, assuming relative stability in the
exchange rate and the maintenance of tight monetary policy, and
to decline further to about 5% by the end of 2017.
The central bank has demonstrated its commitment to containing inflation,
keeping its policy rate at 11% since last July to anchor inflation
expectations, and we expect any loosening to be gradual in light
of still-high inflation expectations.
Recent high-frequency indicators such as industrial production,
services, construction and agricultural output, suggest that
growth is likely to resume after a brief lull in December-January,
driven by net exports, which are benefiting from the roughly 30%
real effective depreciation of the exchange rate over the past two years.
Still, the rating agency expects that household consumption will
be a drag on the economy this year; real wages continue to fall though
at a slower pace, while employment and unemployment rates have been
quite stable.
Based on these recent indicators, which suggest that the impact
of the renewed fall in oil prices was relatively mild and short,
Moody's has reduced its forecast for the economy's contraction
in 2016 marginally to 1.5% from 2%. The rating
agency expects to see positive growth in the second half of the year on
a quarter to quarter basis that could lead to a better annual outcome
as well as positive growth on a yearly average basis in 2017-18,
assuming no further terms of trade shock.
Over the course of 2015, the balance of payments adapted almost
completely to the fall in oil prices. Even though the value of
oil and gas exports continues to fall due to weaker oil prices,
significant import compression means that the current account surplus
remains large enough to finance a significant share of external debt payments
and most capital outflows over the next two years, both of which
have shrunk considerably since 2014. It narrowed in the first quarter
of 2016, according to just-released statistics, but
the capital outflow also declined. Foreign exchange reserves have
stabilized since the introduction of the floating exchange rate regime
in late 2014 and even moved up slightly recently. Still,
at $319 billion, they remain substantially below their recent
peak of $473 billion at the end of 2012.
SECOND DRIVER -- ONGOING FISCAL ADJUSTMENT SEEMS SUFFICIENT TO REDUCE
2016-18 DEFICITS
The second driver for confirming Russia's Ba1 rating is the government's
fiscal response to the renewed fall in oil prices and its plan to contain
its net funding needs by restraining the size of federal budget deficits
in the coming years. The government has undertaken a sizeable fiscal
adjustment this year. A 10% cut in discretionary expenditures
was decided in mid-January, along with a decision later in
the first quarter to take a reported 5% cut in the defense budget
and to trim ministerial appropriations. In addition, various
revenue-raising measures were undertaken, such as increases
in excise taxes, a doubling of dividends from state-owned
enterprises and the maintenance of oil export duties that had been scheduled
to be reduced this year and going forward.
The January-February 2016 federal budget deficit illustrates the
effectiveness of the fiscal response. The budget shortfall was
cut to 0.9% of GDP from 5.9% of GDP in the
same period of last year despite a significant fall in oil and gas revenues
to 5.6% of GDP from 9.1% of GDP. The
improvement in the deficit reflects cuts in primary expenditure,
mainly defense spending. Given the budget consolidation measures
being pursued and using Moody's own oil price assumption of $33/barrel
for 2016, Moody's expects the federal budget deficit to increase
to roughly 3% of GDP this year, followed by deficit roughly
half that size in 2017 as oil prices rise toward the government's
assumed level of $40/barrel, narrowing the gap between Moody's
oil price forecasts and theirs. More substantial fiscal adjustment
will depend on the political willingness to undertake reforms in the pension
system and elsewhere in the public sector.
The confirmation of the rating also reflects Moody's assessment
of the availability of domestic financing for the budget deficit in view
of ongoing international sanctions that have limited international debt
issuance, and expectations that the government can avoid an early
depletion of its Reserve Fund this year. The government's
original financing plan for 2016 was to rely on the bond market to finance
part of the deficit, or R1 trillion in gross terms, and to
use the Reserve Fund for almost all of the remainder.
In Moody's view, the planned issuance levels are credible
given its estimates of the banking system's liquidity. In
addition, the Russian government announced a privatization program
to fill the financing gap as oil revenue prospects fell earlier this year.
While the government's motivations for the program are stronger
now than in the past, in view of the need to raise financing,
Moody's is skeptical that the program will deliver the planned levels
of financing: Russia's track record in following through with
such sales is poor, with programs announced in both 2009 and 2012
being later abandoned by the government.
RATIONALE FOR ASSIGNING A NEGATIVE OUTLOOK
The negative outlook relates to the lack of a comprehensive strategy to
address the quicker depletion of the government's fiscal savings
that would occur should deficits remain above 2%-3%
of GDP and privatization proceeds not materialize to the extent the government
anticipates, which would leave it increasingly reliant on domestic
debt financing at rising cost and shortening maturities. Mooted
reforms, such as of the pension system, aimed at tackling
the underlying causes of fiscal deficits in a low oil price environment,
have not yet materialized. Upcoming elections are likely to play
a role here, undermining the political will to implement far-reaching
structural reform. The parliamentary election will be held in September,
and the next presidential election must be held before April 2018.
By the same token, no strategy has yet emerged to address the economy's
low growth potential and chronic underinvestment. Many years of
dependence on oil and gas receipts have distorted domestic price formation
and substantially deterred investment in other sectors of the economy.
The longer-term challenges posed by this dependence have become
more urgent in a low oil price environment, since the lack of economic
dynamism reduces the flexibility of fiscal policy and limits the government's
ability to deal with a further shock.
WHAT WOULD CHANGE THE RATING -- DOWN
Moody's would downgrade Russia's Ba1 rating were Russia's
credit metrics to deteriorate meaningfully, reducing its room to
maneuver in the event of another oil price or other shock. Indicators
that might lead Moody's to anticipate such a deterioration would
include the exhaustion of fiscal reserves or a material reduction in foreign
currency reserves, sharply rising yields on government debt or deficits
large enough to require monetization by the central bank. Further
stress in the banking system would also contribute to downward pressure
on Russia's ratings because the government needs a stable source
of domestic financing in order to fund its budget deficits, especially
in the context of ongoing international sanctions. Finally,
deterioration in the domestic or regional political environment that resulted
in disruptions to oil production or spurred renewed capital flight or
an expansion of existing sanctions would also be credit negative.
WHAT COULD STABILIZE THE RATING AT THE CURRENT LEVEL AND/OR CHANGE THE
RATING -- UP
Upward pressure on the rating would derive from the enunciation of a clear
and credible economic policy agenda for the medium term, such as
the enactment of reforms to sustainably address the underlying sources
of economic and fiscal vulnerability and thereby boost the country's
growth potential. Such measures might include reducing the economy's
heavy dependence on the hydrocarbon sector for growth and public finance
revenue, lowering the structural deficit of the pension system and
improving the weak investment climate.
GDP per capita (PPP basis, US$): 26,138 (2014
Actual) (also known as Per Capita Income)
Real GDP growth (% change): -3.7% (2015
Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 12.9%
(2015 Actual)
Gen. Gov. Financial Balance/GDP: -3.5%
(2015 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 5% (2015 Actual) (also known
as External Balance)
External debt/GDP: 38.9% (2015 Actual)
Level of economic development: Moderate level of economic resilience
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 19 April 2016, a rating committee was called to discuss the rating
of Russia, Government of. The main points raised during the
discussion were: The issuer's economic fundamentals, including
its economic strength, have not materially changed. The issuer's
governance and/or management, have materially increased.
The issuer's fiscal or financial strength, including its debt profile,
has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2015. Please see the Ratings Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
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.
Kristin Lindow
Senior Vice President
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's confirms Russia's Ba1 sovereign rating; outlook negative
