Perseverance in reforms boosts Russia's sovereign rating
Russia received a boost for its strong economic performance as a major investment-rating agency upgraded its sovereign rating and lauded its fiscal policy last week.
Aug 05, 2002
Russia received a boost for its strong economic performance as a major investment-rating agency upgraded its sovereign rating and lauded its fiscal policy last week.
The agency and other experts cited fundamental economic and political reforms and promising preliminary parameters in the 2003 budget for the upgrade.
Standard & Poor's (S&P), one of the most influential international rating agencies, raised its long-term local and foreign currency sovereign credit ratings on Russia from B+ to BB- and affirmed its single-B short-term ratings. Overall, it upgraded the country's outlook from positive to stable.
"The upgrade reflects improving 'governability' in the country and an enhanced debt-management policy, as manifested by ongoing progress in passing important legislation and continuing budgetary discipline," said S&P sovereignty ratings analyst Helena Hessel.
In particular, the passage of a politically challenging bill on the legal purchase and sale of agricultural land indicates close policy coordination between executive and legislative branches, she said.
"The change of management at the Central Bank has increased the prospects for the implementation of important banking reform and financial liberalization, while recent developments in politically influential Gazprom also indicate progress in rationalizing the country's energy sector," she added.
The stable outlook reflects the expectation of sustained prudent fiscal and debt management, and further progress in reforms. An acceleration of reform, particularly in the banking sector, would improve Russia's creditworthiness, S&P said.
"[Promising parameters in] the 2003 budget, which targets a surplus of 0.8 percent of GDP, and the financial flexibility afforded by the reserve fund [usually formed from budget surpluses] which could grow up to 180 billion rubles or about $5.5 billion by the end of the year, are also significant positive factors that have contributed to the new outlook on the country's economy," Hessel said.
Denis Rodionov, a co-director at Brunswick UBS Warburg's Moscow office, also rated the Russian economy highly. "Currently, Russia has one of the strongest economies among emerging markets. This results from a combination of several positive factors, which include surpluses in trade balance, current account balance and the 2002 budget as well as a strong economic growth. No other emerging market has such combination of these factors at the moment," he said.
Several reports analyzing Russia's rosy economic performance against unprecedented volatility on major markets have demonstrated the economy's immunity from the global economic crisis. But this also raises questions on how integrated Russia has become into the global economy.
"Of course, Russia is a part of the global economy. This could be seen easily if the U.S. equity market should slide further downhill, or if world prices on oil - the mainstay of the country's economy - should fall. Then, Russia will definitely feel the pain," Rodionov said.
"Russia is basically immune to the current volatility on international equity markets, not because it's not a part of the global economy, but simply because of the specific nature of the factors that led to the crisis," he continued.
"The crisis on the world's leading equity markets was caused by unprecedented abuse of auditing principles and the speculative trends that have existed on those markets for the past three years. These two main factors do not exist in Russia today - or, at least, not on a scale similar to that on the U.S. and other markets."
However, the 2003 debt-repayment deadline, when most of the country's foreign debts - about $17 billion - are due, has stained the rosy picture. Though Prime Minister Mikhail Kasyanov and Finance Minister Alexei Kudrin have repeatedly said the country is ready to fulfill its obligations, the 2003 issue rose again after the Taxation and Revenue Ministry's failure to meet its earlier forecast target in the first half of 2002.
"The government announced disappointing tax figures- with the amount of taxes in June about $300 million below target. The government does not have a clear explanation for this weakness," Brunswick UBS Warburg's market report said. A hole of about $1.5 billion has developed in the reserve fund. In a search for a way out, the government approved a plan last week to borrow about $680 million from international financial organizations and issue eurobonds worth about $1 billion, to produce the required sum.
If all these programs are effectively implemented, then the government will have no sleepless nights over the issue, experts said.
"The issue of 2003 debt-payment deadline is not expected to be a major problem for the 2003 budget. The current high oil prices - a trend expected to continue next year - and an expected rebound in revenue collection will enable the government to weather the peak payment without much pain," UBS' Rodionov added.
The agency and other experts cited fundamental economic and political reforms and promising preliminary parameters in the 2003 budget for the upgrade.
Standard & Poor's (S&P), one of the most influential international rating agencies, raised its long-term local and foreign currency sovereign credit ratings on Russia from B+ to BB- and affirmed its single-B short-term ratings. Overall, it upgraded the country's outlook from positive to stable.
"The upgrade reflects improving 'governability' in the country and an enhanced debt-management policy, as manifested by ongoing progress in passing important legislation and continuing budgetary discipline," said S&P sovereignty ratings analyst Helena Hessel.
In particular, the passage of a politically challenging bill on the legal purchase and sale of agricultural land indicates close policy coordination between executive and legislative branches, she said.
"The change of management at the Central Bank has increased the prospects for the implementation of important banking reform and financial liberalization, while recent developments in politically influential Gazprom also indicate progress in rationalizing the country's energy sector," she added.
The stable outlook reflects the expectation of sustained prudent fiscal and debt management, and further progress in reforms. An acceleration of reform, particularly in the banking sector, would improve Russia's creditworthiness, S&P said.
"[Promising parameters in] the 2003 budget, which targets a surplus of 0.8 percent of GDP, and the financial flexibility afforded by the reserve fund [usually formed from budget surpluses] which could grow up to 180 billion rubles or about $5.5 billion by the end of the year, are also significant positive factors that have contributed to the new outlook on the country's economy," Hessel said.
Denis Rodionov, a co-director at Brunswick UBS Warburg's Moscow office, also rated the Russian economy highly. "Currently, Russia has one of the strongest economies among emerging markets. This results from a combination of several positive factors, which include surpluses in trade balance, current account balance and the 2002 budget as well as a strong economic growth. No other emerging market has such combination of these factors at the moment," he said.
Several reports analyzing Russia's rosy economic performance against unprecedented volatility on major markets have demonstrated the economy's immunity from the global economic crisis. But this also raises questions on how integrated Russia has become into the global economy.
"Of course, Russia is a part of the global economy. This could be seen easily if the U.S. equity market should slide further downhill, or if world prices on oil - the mainstay of the country's economy - should fall. Then, Russia will definitely feel the pain," Rodionov said.
"Russia is basically immune to the current volatility on international equity markets, not because it's not a part of the global economy, but simply because of the specific nature of the factors that led to the crisis," he continued.
"The crisis on the world's leading equity markets was caused by unprecedented abuse of auditing principles and the speculative trends that have existed on those markets for the past three years. These two main factors do not exist in Russia today - or, at least, not on a scale similar to that on the U.S. and other markets."
However, the 2003 debt-repayment deadline, when most of the country's foreign debts - about $17 billion - are due, has stained the rosy picture. Though Prime Minister Mikhail Kasyanov and Finance Minister Alexei Kudrin have repeatedly said the country is ready to fulfill its obligations, the 2003 issue rose again after the Taxation and Revenue Ministry's failure to meet its earlier forecast target in the first half of 2002.
"The government announced disappointing tax figures- with the amount of taxes in June about $300 million below target. The government does not have a clear explanation for this weakness," Brunswick UBS Warburg's market report said. A hole of about $1.5 billion has developed in the reserve fund. In a search for a way out, the government approved a plan last week to borrow about $680 million from international financial organizations and issue eurobonds worth about $1 billion, to produce the required sum.
If all these programs are effectively implemented, then the government will have no sleepless nights over the issue, experts said.
"The issue of 2003 debt-payment deadline is not expected to be a major problem for the 2003 budget. The current high oil prices - a trend expected to continue next year - and an expected rebound in revenue collection will enable the government to weather the peak payment without much pain," UBS' Rodionov added.