Repost: S&P Lowers Russia's FC Rtg to 'B+', Outlook Stable
Business Wire - June 09, 1998 05:55
ÿÿ LONDON--(BUSINESS WIRE)--S&P's CreditWire 6/9/98--Standard & Poor's today lowered the Russian Federation's long-term foreign currency issuer credit and senior unsecured ratings to single-'B'-plus from double-'B'-minus. The ratings were removed from CreditWatch, where they were placed with negative implications on May 27, 1998. Standard & Poor's also affirmed its single-'B' short-term foreign currency issuer credit rating. The outlook on the long-term rating is stable.
ÿÿ The downgrade reflects a significant weakening of Russia's fiscal and external payments flexibility, which should be only partially reversed by the fiscal measures announced by the government in recent weeks. Large fiscal deficits in 1996-1997, and in the first few months of 1998, have increased Russia's reliance on external finance -- in terms of debt denominated in both roubles and foreign currency -- a vulnerability likely to persist medium term. The resulting rapid increase in the external debt, combined with declining exports, should boost the ratio of federal government debt to exports to about 156% this year, up from 138% in 1997 and 127% in 1996. Net of central bank reserves, federal debt likely will grow to about 142% of exports in 1998, from 123% in 1997 and 112% in 1996. At the same time, the federal government's debt service burden has almost doubled to an estimated 28% in 1998, from less than 15% in 1996. As principal repayments debt start rising over the next !
few years, the government's servicing burden will almost certainly exceed 30% of exports on current trends.
ÿÿ With non-government sector borrowings rising rapidly in recent years, the ratio of the country's total external debt to exports should reach 193% of exports in 1998, up from 175% last year and 149% in 1996. Net external debt should reach an estimated 158% of exports, from 138% in 1997 and 112% in 1996. As a result, the total debt service burden has grown significantly, to an estimated 57% of exports this year, up from 30% in 1996. Key factors constraining Russia's foreign currency rating include: -- Very limited fiscal flexibility, as evidenced by a high and rising interest burden (at least 48% of tax revenue in 1998) and the risk of renewed financial stress if a tighter fiscal policy cannot be sustained.
ÿÿ -- Poor payment discipline throughout the economy, manifested by large inter-enterprise arrears, as well as tax and budgetary payment arrears, which still result in the widespread use of barter and money substitutes. Such payment practices continue to distort business decisions and contribute to the slow recovery of economic output.
ÿÿ -- A weak legal system, including lax enforcement, that continues to foster widespread corruption and lawlessness, which discourages foreign investment, hinders the development of the private sector and acts as a drag on overall economic activity.
ÿÿ -- A still developing democratic culture and political institutions. In particular, continued friction between the reform-oriented executive branch and communist-dominated Duma has slowed the policy decision-making process and stalled reforms in some sectors.
ÿÿ Key elements supporting the ratings include:
ÿÿ -- The policymakers' strong commitment to disinflation, with consumer price inflation now 12%, down from 15% in 1997 and the hyperinflationary conditions of earlier years.
ÿÿ -- Continued official external financial support, including the IMF and the World Bank, which cushions somewhat Russia's credit standing against external economic shocks and investment risks. OUTLOOK: Stable
ÿÿ The outlook reflects Standard & Poor's view that the government will be able to implement a number of elements of its new fiscal plan, announced on May 29. However, with real interest likely to remain high, the budget deficit is unlikely to fall to the targeted 4.9% of GDP from 6.8% last year. Still, stronger fiscal measures should help manage pressures on the rouble and interest rates, as well as volatile confidence-sensitive capital flows. However, if the government's commitment to fiscal improvements medium term again falters, pressure on interest rates and foreign exchange reserves likely would revive, and further downward pressure on the rating could result, Standard & Poor's said. ---CreditWire
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ÿÿÿÿÿÿÿÿÿÿÿÿÿÿ Helena Hessel, New York (1) 212-208-1989
ÿÿÿÿÿÿÿÿÿÿÿÿÿÿ David Beers, London (44) 171-826-3646
ÿÿÿÿÿÿÿÿÿÿÿÿÿÿ Konrad Reuss, London (44) 171-826-3523
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