Russia’s Stable Outlook Offset by Potential for Medium-term Credit Risk in the Regions

Moody’s Investors Service says that the financial outlook for the Russian regions is stable, although credit risks may grow in the medium term

The credit ratings agency’s (CRA) Industry Outlook is that the recovery in the Russian economy in 2010-11 has led to a stabilisation in regional financials, reflected in improving operating margins, decreasing financing deficits and contained debt metrics. The stable outlook assigned to the sector is based on its expectations of continuing, albeit decelerating, economic growth,contained funding deficits and manageable debt affordability.

Sustained economic growth in the last two years was the key driver of the stabilisation in regional financials to pre-crisis levels. At year-end 2011, average total revenues for rated Russian regions exceeded the levels recorded in 2008, while operating surplus slightly rose and the majority of financing deficits recovered to modest levels comparable with pre-crisis figures.

In Moody’s central scenario for 2012 it forecasts that Russian regional governments will maintain sustainable fiscal performances,with stable operating margins and contained financing deficits on average. This scenario is based on anticipated gross domestic product (GDP) growth of 3.3%-3.5% and favourable commodity prices.

Also factored in this scenario is the materialisation of some downside risks in the next 12-18 months. The ratings agency believes that conservative budget management and the potential for further austerity measures should help offset key rating pressures,such as a deceleration of economic growth and/or moderate decline in energy prices, anticipated over the outlook period.

At the same time, Moody’s cautions that future challenges may lead to further differentiation as the  progressive decrease in federal transfers and the rate of growth in social obligations may hinder further recovery in regions’ operating margins.Additional medium-term pressures are likely to come from market volatility and regions’ growing refinancing needs.


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