Fitch Upgrades Russia's Ratings; Outlook Changed to Positive
May 06, 2002
Fitch Ratings-London-2 May 2002: Fitch Ratings, the international rating agency, today upgraded the Russian Federation's Long-term foreign currency (and eurobond) rating to 'BB-' (BB minus) from 'B+'. The Long-term local currency rating and MinFin Series VI and VII bonds were upgraded to 'BB-' (BB minus) from 'B', while the ratings on MinFin Series IV, V and VIII bonds were raised to 'B+' from 'B-' (B minus). The Short-term rating was affirmed at 'B', and the Outlook on the Long-term ratings was changed to Positive from Stable.
The agency said that the upgrades reflect its increased confidence that the step-up in public external debt service in 2003 no longer poses a significant risk to payment, even if oil prices were to drop sharply. Consequently, the main risks now lie with the structural weaknesses of the Russian economy. These are of a more medium-term nature, meriting Russia's graduation to the 'double B' rating range. The Positive Outlook reflects Fitch's expectation that, under President Putin's leadership, the Russian authorities will continue to introduce and implement structural reforms that are vital to raise living standards and diversify the economy.
Fitch noted that Russia's good macroeconomic performance is continuing. GDP growth slowed around the turn of the year, after rates of 9% in 2000 and 5% in 2001. But it is now picking up and Fitch expects growth of 4% this year. Fitch expects a current account surplus of 6.5% of GDP this year, albeit down from 11.3% in 2001. This surplus and a decline in capital flight have enabled Russia to both repay debt early and increase foreign exchange reserves to USD38 billion in mid-April, from USD12 billion at end-1999. As a result, gross external debt has dropped from 210% of current account receipts (CXR) at end-1999 to 138% of CXR at end-2001, close to the median of 'BB' rated sovereigns. Over the same period, the liquidity ratio rose from 88% to 150%, above the 'BB' median of 115%.
The agency said that disciplined fiscal policy and prudent use of the oil price windfall has played a key role in rebuilding Russia's creditworthiness. The federal government budget balance has been tightened from -5% of GDP in 1998 to +3% of GDP in 2001. Fitch estimates that the ratio of general government debt to GDP has halved from 98% of GDP at end-1999 to 49% at end-2001, while the ratio of government debt to revenues has fallen from 273% to 125%. Moreover, the recent agreement with Germany on restructuring GDR debt has effectively knocked another USD6bn off Russia's recorded public and external debt.
Fitch is encouraged that tax receipts have continued to rise so far this year, despite weaker oil prices. On Fitch's oil price assumption of USD19.5 per barrel for Urals (compared with the budget assumption of USD23.5 p/b), it expects a budget surplus of around 1% of GDP, without the government having to cut budgeted expenditure. A fiscal reserve of USD2.8bn provides an additional fiscal cushion. In Fitch's opinion, the jump in public external debt service from about USD12bn in 2002 to around USD16bn-17bn in 2003 (at one time estimated at USD20.5bn) is no longer a significant risk, even if oil prices were to drop markedly. In that event and if necessary, the government has said it would cut expenditure. It would also have access to additional financing from privatisation, domestic and external debt issuance, or new IMF loans. Therefore, it is difficult to envisage an economic situation in which Russia would need to reschedule debt in 2003.
The agency said that the rationale for assigning different ratings to different categories of debt has reflected the Russian authorities' debt management strategy of prioritising payment on certain classes of debt. Fitch has, today, upgraded all the MinFin Series bonds by two notches, compared with the one notch upgrade for eurobonds, their gearing to the improvement in Russian creditworthiness is greater. MinFins are US dollar denominated bonds, governed by Russian law. However, Fitch still rates MinFin series IV, V and VIII, which are debts originally contracted by the Former Soviet Union, at 'B+', because Russia's payment record shows that it is more likely to restructure these than debt originally contracted by the Russian Federation. Russia's recent default history and subsequent treatment of creditors, including again, temporarily, running up arrears to the Paris Club on Soviet-era debt in early 2001, means that it will take time to strengthen confidence further in its willingness as well as capacity to service its debts.
Fitch has, today, also upgraded Russia's local currency rating by two notches, to the same level as its foreign currency rating. In most cases, local currency ratings are at least as high as the foreign currency ratings, as countries have a greater capacity for payment in local currency. In Russia's case, however, it defaulted on Russian-era domestic debt (GKOs) in 1998, while it continued to service Russian-era foreign currency debt such as eurobonds. The federal government's stronger fiscal position and the fact that its domestic debt is just 6% of GDP, compared with foreign debt of 41% of GDP now argues for moving the local currency rating up to parity. The implementation of the recent announcement by Oleg Vyugin, the new First Deputy Head of the Central Bank of Russia (CBR), that the authorities intend to liberalise around USD3.2bn from remaining defaulted GKOs which are frozen in 'S-accounts' would mark a further step towards drawing a line under the default.
The agency said that the dissipation of short-term financing concerns means that the main sovereign risks now relate to the vast structural problems of the Russian economy. It remains heavily dependent on energy and largely unreformed natural monopolies, and requires massive investment to maintain and modernise infrastructure and plants. Business activity is suffocated by red tape, corruption and an uncertain legal environment. The banking sector is small, under-capitalised and dominated by state banks. Last year FDI was a paltry USD18 per head. Encouragingly President Putin has used his strong political position to launch a burst of structural reforms in areas such as tax, business deregulation, banking, land ownership, judicial reform, labour relations, pension reform, natural monopoly reform and preparation for WTO accession. He has also inserted new management at Gazprom and the CBR. Fitch has assigned a Positive Outlook in the expectation that these positive trends will continue. Further upward movement in the rating would depend on further reforms actually happening, evidence that reforms are being implemented on the ground, and their impact in modernising the economy and delivering sustainable growth.
The agency said that the upgrades reflect its increased confidence that the step-up in public external debt service in 2003 no longer poses a significant risk to payment, even if oil prices were to drop sharply. Consequently, the main risks now lie with the structural weaknesses of the Russian economy. These are of a more medium-term nature, meriting Russia's graduation to the 'double B' rating range. The Positive Outlook reflects Fitch's expectation that, under President Putin's leadership, the Russian authorities will continue to introduce and implement structural reforms that are vital to raise living standards and diversify the economy.
Fitch noted that Russia's good macroeconomic performance is continuing. GDP growth slowed around the turn of the year, after rates of 9% in 2000 and 5% in 2001. But it is now picking up and Fitch expects growth of 4% this year. Fitch expects a current account surplus of 6.5% of GDP this year, albeit down from 11.3% in 2001. This surplus and a decline in capital flight have enabled Russia to both repay debt early and increase foreign exchange reserves to USD38 billion in mid-April, from USD12 billion at end-1999. As a result, gross external debt has dropped from 210% of current account receipts (CXR) at end-1999 to 138% of CXR at end-2001, close to the median of 'BB' rated sovereigns. Over the same period, the liquidity ratio rose from 88% to 150%, above the 'BB' median of 115%.
The agency said that disciplined fiscal policy and prudent use of the oil price windfall has played a key role in rebuilding Russia's creditworthiness. The federal government budget balance has been tightened from -5% of GDP in 1998 to +3% of GDP in 2001. Fitch estimates that the ratio of general government debt to GDP has halved from 98% of GDP at end-1999 to 49% at end-2001, while the ratio of government debt to revenues has fallen from 273% to 125%. Moreover, the recent agreement with Germany on restructuring GDR debt has effectively knocked another USD6bn off Russia's recorded public and external debt.
Fitch is encouraged that tax receipts have continued to rise so far this year, despite weaker oil prices. On Fitch's oil price assumption of USD19.5 per barrel for Urals (compared with the budget assumption of USD23.5 p/b), it expects a budget surplus of around 1% of GDP, without the government having to cut budgeted expenditure. A fiscal reserve of USD2.8bn provides an additional fiscal cushion. In Fitch's opinion, the jump in public external debt service from about USD12bn in 2002 to around USD16bn-17bn in 2003 (at one time estimated at USD20.5bn) is no longer a significant risk, even if oil prices were to drop markedly. In that event and if necessary, the government has said it would cut expenditure. It would also have access to additional financing from privatisation, domestic and external debt issuance, or new IMF loans. Therefore, it is difficult to envisage an economic situation in which Russia would need to reschedule debt in 2003.
The agency said that the rationale for assigning different ratings to different categories of debt has reflected the Russian authorities' debt management strategy of prioritising payment on certain classes of debt. Fitch has, today, upgraded all the MinFin Series bonds by two notches, compared with the one notch upgrade for eurobonds, their gearing to the improvement in Russian creditworthiness is greater. MinFins are US dollar denominated bonds, governed by Russian law. However, Fitch still rates MinFin series IV, V and VIII, which are debts originally contracted by the Former Soviet Union, at 'B+', because Russia's payment record shows that it is more likely to restructure these than debt originally contracted by the Russian Federation. Russia's recent default history and subsequent treatment of creditors, including again, temporarily, running up arrears to the Paris Club on Soviet-era debt in early 2001, means that it will take time to strengthen confidence further in its willingness as well as capacity to service its debts.
Fitch has, today, also upgraded Russia's local currency rating by two notches, to the same level as its foreign currency rating. In most cases, local currency ratings are at least as high as the foreign currency ratings, as countries have a greater capacity for payment in local currency. In Russia's case, however, it defaulted on Russian-era domestic debt (GKOs) in 1998, while it continued to service Russian-era foreign currency debt such as eurobonds. The federal government's stronger fiscal position and the fact that its domestic debt is just 6% of GDP, compared with foreign debt of 41% of GDP now argues for moving the local currency rating up to parity. The implementation of the recent announcement by Oleg Vyugin, the new First Deputy Head of the Central Bank of Russia (CBR), that the authorities intend to liberalise around USD3.2bn from remaining defaulted GKOs which are frozen in 'S-accounts' would mark a further step towards drawing a line under the default.
The agency said that the dissipation of short-term financing concerns means that the main sovereign risks now relate to the vast structural problems of the Russian economy. It remains heavily dependent on energy and largely unreformed natural monopolies, and requires massive investment to maintain and modernise infrastructure and plants. Business activity is suffocated by red tape, corruption and an uncertain legal environment. The banking sector is small, under-capitalised and dominated by state banks. Last year FDI was a paltry USD18 per head. Encouragingly President Putin has used his strong political position to launch a burst of structural reforms in areas such as tax, business deregulation, banking, land ownership, judicial reform, labour relations, pension reform, natural monopoly reform and preparation for WTO accession. He has also inserted new management at Gazprom and the CBR. Fitch has assigned a Positive Outlook in the expectation that these positive trends will continue. Further upward movement in the rating would depend on further reforms actually happening, evidence that reforms are being implemented on the ground, and their impact in modernising the economy and delivering sustainable growth.