Dagong Global Credit Rating Co., Ltd.
September 6, 2017
Dagong Global Credit Rating Co., Ltd. (“Dagong”) has today decided to maintain the local and foreign currency sovereign credit ratings of the Russian Federation (“Russia”) at A, each with a stable outlook. Although new sanctions imposed by the United States and Europe Union have put the Russian debt service environment under constant pressure, a recovery of the inner driving force for the Russian economy facilitates fiscal consolidation. Coupled with low government debt loads and a reasonable structure, the development of new financing channels, adequate international reserves and net creditor status ensure the stability of government solvency.
The key reasons for maintaining the sovereign credit ratings of Russia are as follows:
1. Russia’s domestic political situation remains stable, but new sanctions imposed by western countries place its debt repayment environment under constant pressure. The long-term ruling position of United Russia safeguards domestic political stability and the continuity of policy. In the short term, the United States and European Union’s widening sanctions against Russia have led to an external environment with continuing difficulties, thus it is hard to improve geopolitical risks. However, external sanctions have forced Russia to vigorously pursue an import substitution strategy and make industrial structure adjustments, and therefore the agriculture and machinery manufacturing industries have been further developed, which is likely to strengthen the country’s inner driving force.
2. The country’s overall banking system has remained stable, although experiencing higher asset quality risks. In 2016, the Russian banking system’s capital adequacy level, profitability and liquidity have all improved. However, regulatory forbearance during the economic crisis has led to cumulative risks in the bank asset quality. The non-performing loan (NPL) ratio has reached 9.8% as of April 2017. In the short term, economic recovery is expected to improve the banking asset quality.
3. The Russian economy will climb out of recession in the short term. However, the country’s low birth rate, aging population, its poor transportation infrastructure, and other factors will all restrict its medium- and long-term economic development. Given that a drop in inflation shores up the residents’ purchasing power and lower interest rates reduce credit costs of consumption and investment, the Russian economy is expected to achieve 1.4% of recovery growth in 2017. Additionally, private consumption will accelerate in 2018, and the soccer World Cup could further stimulate public investment. Nevertheless, economic growth is expected to remain at 1.4%. In the medium and long term, Russia’s energy endowment will remain a strong support for economic growth. However, the country’s low birth rate, aging population and backward transport infrastructure all restrict its long-term economic development. It is expected that Russia's average economic growth rate will be 1.5% over the next five years.
4. The fiscal deficit will narrow in the short term, and debt repayment sources are stable. In the short term, the government will cut expenditures on national defense, housing and communal services. It will also raise the transfer of dividends of state-owned enterprises and increase tax revenue from the energy sector. It is expected that the fiscal deficit will drop to 2.5% in 2017. The ratio of the government’s financing needs to GDP will be only 4.2% over the same period, and thereafter enters into a downward channel. Debt financing is an important source of government debt repayment. But because financial sanctions by the United States and European Union have limited Russia’s financing channels and maturity, Russia gradually turns to Asia to explore new financing channels.
5. Russia’s low government debt loads with a rational structure will keep the government solvency stable. The debt burden of Russia’s general government was only 15.6% in 2016, of which external debt accounted for 28%, and thus produced less pressure of debt repayment. In the short term, the government debt burden rates are expected to be 16.5% and 17.8% in 2017 and 2018, respectively, still at low levels. Moreover, persistent current-account surplus and net creditor status could both guarantee an external buffer capacity, and the government solvency in local and foreign currency remains stable.
Although new sanctions imposed by the US and EU affect the Russian debt repayment environment, ultimately its domestic political situation remains stable and industrial structure adjustment continues to advance. Its economy achieves recovery. Meanwhile, lower government debt loads, adequate international reserves and net creditor status ensure the government’s solvency stable. Taking all these factors into consideration, Dagong has decided to maintain a stable outlook for the local and foreign currency sovereign credit ratings of Russia for the next one to two years.