|Moody's assigns Baa3 issuer rating to Astana City; outlook stable|
Global Credit Research - 29 May 2012
Moody's Investors Service has today assigned first-time global-scale foreign and localcurrency issuer ratings of Baa3 to the City of Astana, Kazakhstan Republic's capital. The rating outlook is stable.
"The City of Astana's ratings are supported by its improving operating margins and consistently low financing deficits, which are based on the city's dynamic and diversified economy and the more benign fiscal framework. Its low debt burden is a further credit-positive factor for the city's rating," says Alexander Proklov, a Moody's Senior Analyst and lead analyst for the City of Astana.
After having suffered in 2009-10, due to the combination of economic slowdown and unfavourable fiscal framework resulting in mandatory fiscal transfers to the national government (the so-called budget withdrawals), Moody's notes that Astana's budgetary results for FY2011 are robust. Improving economic conditions combined with the cancellation of the budget withdrawals have boosted operating margins to 21.7% in 2011 (2010: 9.5%). Moody's expects that stable double-digit operating margins are likely to remain in the medium term. At the same time, a conservative budgetary management strategy enabled the city to record close-to-balance financial results and limit borrowing requirements. Moody's says that Astana's buoyant economic prospects and favourable fiscal framework provide solid foundations for sound municipal finances.
Low funding deficits have allowed the city to maintain modest debt levels, at 23.3% of operating revenue in 2011, represented by interest-free lending from the central government provided to improve the local housing infrastructure. Given that the city is not planning to incur any market debt in the medium term, the debt will remain modest and intrinsically simple, with very limited refinancing risks.
"The central government's substantial investment in the city's infrastructure projects is credit positive for the city.
About two thirds of the city's budget revenue represented capital transfers in 2009-11, as the reconstruction of a large part of the city's infrastructure could not have been achieved solely with the city's own tax revenues. However, given that the city's ow n-source tax base will increase following the city's rapid economic development, we expect that the proportion of capital transfers will gradually decrease in the medium-to-long term", adds Mr Proklov.
At the same time, Astana's ratings are constrained by rigidity on both the revenue and expenditure sides of the municipal budget. Furthermore, municipal revenues are highly exposed to economic cycles, which are influenced by volatile oil prices. "The ability to increase own-source revenue is restricted by the national law, whilst operating expenditure is progressively growing due to inflationary pressures and increasing maintenance costs from the construction of new social facilities and infrastructure," says Mr Proklov.
Moody's also notes that the city's liquidity position is typically weak, largely reflecting the national regulation, which is not in favour of municipalities maintaining substantial cash reserves. At year-end 2011, Astana's liquidity position accounted for only around 3% of its operating revenue, which is typical for the jurisdiction overall.
WHAT COULD MOVE THE RATINGS UP/DOWN
Moody's notes that upwards pressure on the Baa3 rating may develop if (i) the city's own-source budget revenue increases, leading to consistently robust operating balances; and (ii) if this is accompanied by stable debt levels.
Downwards pressure might develop on the rating if (i) the city experiences substantial increases in its market debt;
(ii) its financing deficit is consistently high; and/or (iii) its self-financing capacity weakens.
The methodologies used in this rating were Regional and Local Governments Outside the US published in May 2008, and The Application of Joint-Default Analysis to Regional and Local Governments published in December 2008. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
The City of Astana is located in central Kazakhstan. Astana has seen rapid population and economic growth following the transfer of the functions of capital city, state agencies and the head offices of Kazakhstan's largest companies from Almaty in 1997. Its population rose to 750,000 (approximately 5% of Kazakhstan's entire population) in 2001 from 270,000 in 1998 and, according to the latest estimates, could reach 880,000 by 2016. The city's gross regional product grew to around 9% of national GDP in 2011 from 2% in 1998.