New York, January 16, 2015 -- Moody's Investors Service has today downgraded Russia's government
bond rating to Baa3/Prime 3 (P-3) from Baa2/Prime 2 (P-2).
The rating was also placed on review for further downgrade.
The key drivers behind the downgrade are:
1) Moody's expectation that the substantial oil price and exchange
rate shock will further undermine the country's already subdued
growth prospects over the medium term; and
2) Moody's nearer-term concerns over the negative impact
on the government's financial strength of the erosion in official
foreign exchange buffers and fiscal revenues.
In the review for further downgrade, Moody's will assess the
resiliency of the government's balance sheet, in particular
its foreign currency reserves cushion, to both the rating agency's
baseline forecast for oil prices and to the risk of a further decline
in oil prices at a time when international market access is restricted
for Russian borrowers due to sanctions. The review will also focus
on the efficacy of policy actions that the Russian central bank and fiscal
policymakers may take to address the oil and exchange rate shock in an
effort to preserve economic and government financial strength.
Moody's also lowered Russia's country ceilings for foreign
currency debt to Baa3/Prime 3 (P-3) from Baa2/Prime 2 (P-2)
to align it with the sovereign rating, and reduced the long-term
country ceilings for local currency debt and deposits to Baa2 from Baa1,
while leaving unchanged the country ceiling for foreign currency bank
deposits at Ba1/Non Prime (NP).
RATINGS RATIONALE
RATIONALE FOR DOWNGRADE TO Baa3
- FIRST DRIVER: OIL PRICE AND EXCHANGE RATE SHOCKS WILL FURTHER
UNDERMINE RUSSIA'S ECONOMIC GROWTH PROSPECTS
Moody's one-notch downgrade to Baa2 in October 2014 balanced
an increasingly subdued growth outlook -- in part reflecting Russia's
weak institutional strength and the challenging geopolitical environment
-- against the government's still extremely strong balance
sheet. The negative outlook reflected the fragile nature of that
balance, with both the growth outlook and the government's
fiscal position exposed to further shocks that could more profoundly undermine
consumer and investor confidence, hastening the erosion of fiscal
and foreign currency buffers.
As evidenced by the recent further steep falls in oil prices and the exchange
rate, these shocks have materialized. According to Moody's,
the severe -- and likely to be sustained -- oil price shock,
alongside Russian borrowers' highly restricted international market
access due to ongoing sanctions, is undermining economic fundamentals
and increasing financial stresses on both the public and private sectors.
In its updated growth outlook for Russia, Moody's now expects
real GDP contractions of around 5.5% in 2015 and 3%
in 2016, bringing real growth over the 10 years through 2018 to
virtually zero.
The hike in interest rates that took place in December and rapidly rising
inflation, which will inhibit the central bank from easing rates
in the coming months, will further squeeze consumers' disposable
incomes. In addition, the capacity of the banking sector
to provide credit is impaired, causing credit to be scarce,
and expensive when available. Moody's expects that even if
interest rates are lowered over time, lending will remain constrained;
asset quality and profitability problems in the banking system will likely
escalate the longer that the recession lasts despite efforts by the government
to bolster the system's capital and funding base.
The high level of uncertainty is likely to cause the savings rate to rise,
thereby further undermining consumption and economic recovery, in
contrast to a situation in which households believe that the recession
would be short-lived.
- SECOND DRIVER: NEGATIVE IMPACT ON GOVERNMENT'S FINANCIAL
STRENGTH OF ERODING FOREIGN EXCHANGE BUFFERS AND FISCAL REVENUES
Although the rating agency expects Russia's current account to stay
in surplus due to import compression and continued capital flight,
the ongoing repayment of external debt by the corporate, banking
and public sectors and the outflow of direct investment will likely increase
the speed of erosion of official foreign reserves, says Moody's.
In Moody's view, Russia's nominal FX reserves could
fall by at least as much this year as they did in 2014, when they
declined by around $125 billion. These estimates are based
on the pattern and levels of public and private sector debt amortization,
and on assumptions regarding the private sector's drawdown of its
accumulated cash reserves and capital flight.
Moody's notes that an additional erosion of FX reserves would not
in itself be critical for the government's capacity to service its
debt. Russia -- especially the government -- is not heavily
indebted and its debt maturity schedule is relatively elongated after
the maturities falling due in 2014-15 have been paid. However,
while the loss of reserves will probably not endanger the government's
capacity to service its own debt, significant uncertainty exists
over the future dimension and direction of foreign reserves. That
uncertainty is an important driver of the decision to move the rating
down to Baa3.
Moody's also expects that the oil price shock, and the ensuing
recession, will cause the government's fiscal position to
worsen. Although the impact of the drop in oil prices on ruble-denominated
government revenues will be partly offset by the depreciation of the exchange
rate, and high inflation will likely limit the impact on non-oil
revenues, Moody's expects that the government's revenues
will nonetheless fall significantly over the course of next year as Russia's
economy contracts. Set against that, it is likely that some
form of fiscal stimulus will be implemented either this year or next to
mitigate the economic and political consequences of the crisis.
Together, Moody's expects these influences to widen the fiscal deficit,
with the result that government debt will rise over the next two to three
years, albeit from very low levels.
Added to that, the risk of politically-motivated actions
which either directly or indirectly raise risks to creditors is rising
in the context of current geopolitical tensions. Even if that risk
remains low, its rise further shifts the delicate balance identified
at the time of the last rating action to the downside.
Moody's notes that the government's balance sheet remains
ostensibly very strong, with very low debt levels and a recent track
record of fiscal prudence. Even with a significant further weakening
of the country's reserves position, Russia's liquidity
ratios such as Moody's external liquidity indicator (EVI) would
remain relatively strong. At the end of 2015, the 1-year
EVI is estimated at 28.9% (measuring debt obligations falling
due in the year against official foreign reserves levels). Import
coverage of foreign currency reserves would also remain adequate,
although that number is somewhat flattered by the expected import compression.
RATIONALE FOR REVIEW FOR FURTHER DOWNGRADE
The government's ability to sustain its financial strength,
which is the main factor supporting the country's investment grade
rating, rests on a large number of assumptions regarding,
for example: oil prices and the exchange rate; the longevity
of sanctions; capital flows; the effect of import compression
on the current account balance; the impact of recession and inflation
on the government's fiscal position; and the policy response
to domestic or external financial pressures. Small changes in assumptions
could imply a more severe decline of reserves and a more rapid accumulation
of debt by the government.
The review of Russia's Baa3 government rating for downgrade will
examine all of these assumptions in order to form a definitive view of
the resilience of the economy and the government's balance sheet
to further shocks. The review will focus, inter alia,
on the resilience of the government's foreign currency reserves
buffer to both our baseline forecast for oil prices and to more conservative
scenarios. Should oil prices fail to recover in 2016 and beyond,
or even drop further, Russia's recession would likely persist
beyond 2016 and the loss of investor and consumer confidence would be
even more profound, leading to continued capital flight.
The rating agency will examine the options available to the central bank
and the government to support the economy in such circumstances.
In particular, Moody's will focus on whether foreign currency
reserves can be maintained at a level sufficiently higher than similarly
rated peers with stronger institutional strength and policy predictability.
In addition, the review will examine the extent to which the potential
need to provide financial support of the corporate and banking sectors
may erode the sovereign's financial strength and increase its susceptibility
to event risks by reducing the central bank reserves, increasing
the government budget deficit and/or increase the use of government guarantees.
WHAT COULD CHANGE THE RATING -- UP
Given the review for downgrade of the government's rating currently
in effect, limited upward pressure is likely in the next 12-18
months. Moody's would confirm the current rating of Baa3
if the scenario analysis undertaken during the review were to show resilience
in the country's external and fiscal position.
WHAT COULD CHANGE THE RATING -- DOWN
Russia's ratings would be downgraded should Moody's conclude,
following the review, that the combination of risk factors identified
above would likely lead to a more pronounced erosion of the government's
external buffer and/or fiscal balance, leading to a loss of financial
strength to a level inconsistent with its current rating. In that
event, the most likely outcome would be a one notch downgrade,
although more severe outcomes cannot be ruled out in the current volatile
environment.
GDP per capita (PPP basis, US$): 24,298 (2013
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1.3% (2013 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 6.5%
(2013 Actual)
Gen. Gov. Financial Balance/GDP: -1.3%
(2013 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 1.6% (2013 Actual) (also
known as External Balance)
External debt/GDP: 35.1% (2013 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 14 January 2015, a rating committee was called to discuss the
rating of the Russia, Government of. The main points raised
during the discussion were: The issuer's fiscal or financial strength,
including its debt profile, has materially decreased. The
issuer has become increasingly susceptible to event risks.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in September 2013. Please see the Credit Policy 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 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 rating action on the support provider and in relation to each particular
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 rating action, and
whose ratings may change as a result of this 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
Alastair Wilson
MD-Global 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 downgrades Russia's government bond rating to Baa3; on review for further downgrade
