Fitch Ratings yesterday upgraded the Russian Federation's long-term foreign and local currency ratings to 'BBB' from 'BBB-' . The country ceiling has also been upgraded to 'BBB' from 'BBB-'.
"The rating action is underpinned by a massive improvement in the government's financial ratios," said Sharon Raj, a Director in Fitch's sovereign group and the agency's lead analyst for Russia. "We estimate that the general government surplus is likely rise to around 6% of GDP this year, supported by high oil prices as well as back tax payments.
Against a background of real rouble appreciation, GDP growth of 5.5% and external debt prepayments to the IMF and the Paris Club of more than USD17 billion, this should result in a decline in government debt to 17% of GDP by end-year, far below the 'BBB' median of 36%, as well as the continued accumulation of assets in the Stabilisation Fund."
Prospects for the public sector's balance sheet beyond 2005 are also encouraging. Despite the marked fiscal loosening that is now underway, enduring high oil prices should allow the budget to remain in surplus and the Stabilisation Fund, which Fitch estimates could reach USD47bn by early-2006, to grow further in 2006-07, raising the possibility of further debt prepayments over the medium term.
Trends in the private sector's external position have not been as strong because of continued capital flight and private sector borrowing. Even so, Russia's overall gross external debt ratios have continued to improve and compare well with those of its rating peers, while reserves have remained on a rising trend. Indeed, Fitch estimates that by the end of 2005 official reserves including gold could reach USD174bn and the country as a whole could become a net creditor during 2006-07.
Turning to the Rating outlook, Fitch notes that the sovereign rating continued to reflect the balance between Russia's strong financials and its structural weaknesses such as a high dependence on commodities and a weak banking sector. The agency noted that although key debt ratios are expected to continue to strengthen, doubts over the long-term growth picture have risen in line with faltering progress with structural reforms and continued uncertainty over property rights.
Fitch cautioned that further progress with structural reforms is likely to be hampered by administrative weaknesses, vested interests and fears of further public protests in light of those that followed the benefit reforms at the start of 2005. Attention is also increasingly being diverted by the 2007-08 parliamentary and presidential elections. As these draw nearer, spending pressures and political risk are likely to rise. Nonetheless, the agency stressed that the 2005 prepayment of external debt, considerable FX reserves and rising SF assets provide a strong buffer against shocks.