(The following statement was released by the rating agency)
Nov 14 - In a report published Nov. 12, 2012, titled, “Weaker Russian LRGs Will Lose Room To Maneuver In 2013-2014, But Strong Entities Should Stay Creditworthy”, Standard & Poor’s Ratings Services said that its expectations are increasingly negative for the creditworthiness of the whole of Russia’s local and regional governments (LRGs) sector, but more positive for the rated universe, as we largely rate the economically and financially strongest.
Standard & Poor’s rates 15 regions and five municipalities in Russia. Our ratings are in the ‘B’, ‘BB’, and ‘BBB’ categories, and we expect stable or improving credit quality in this rated universe over the next 12-24 months: six local and regional governments (LRGs) have positive outlooks and 13 have stable outlooks. Only one entity has a negative outlook.
“But although the entities we rate are largely the economically and financially strongest in the country, often also with management sophistication above Russia’s average, our expectations for the creditworthiness of the whole LRG sector are increasingly negative,” said Standard & Poor’s credit analyst Boris Kopeykin.
Global economic growth is weaker and consequently we now expect only modest 3%-4% economic growth for Russia. Therefore, LRGs’ revenues in 2012 have been growing slower than in the past few years and we expect only modest revenue growth in 2013-2014. This is a new environment for the LRGs, which had been enjoying strong revenue growth since 2009.
Given that Russian LRGs have almost no revenue flexibility, we believe ongoing growth in spending obligations will put pressure on LRGs’ financial performance, with average, performance consequently deteriorating in 2012-2013.
Importantly, we now expect that the sector’s performance on the operating side in 2013-2014 will be weaker than our base-case scenario that we developed in April 2012, and that more entities than ever will be running operating deficits in 2013-2014. Should revenues be under even stronger pressure than we currently expect, the deterioration might be more pronounced. But due to a wide gap in revenues per capita under the Russian intergovernmental system, and combined with varying levels of expenditure flexibility, under our base case we expect LRGs’ performance to diverge further under a revenue slowdown and increased spending pressures.
Therefore, for most of the entities we rate, we do not expect a further major deterioration in financial performance in 2012-2014 compared with 2011, hence the stable and positive outlooks in our rated universe.