UPDATE 3: Finance Ministry sees Russian debt at 15.3% of GDP in 2019

(Adds more data in paragraphs 12, 13)

MOSCOW, Feb 6 (PRIME) -- State debt will account for 14.6% of gross domestic product (GDP) in 2017, 14.9% in 2018, and 15.3% in 2019, according to principal directions of Russia’s debt policy for 2017–2019 released by the Finance Ministry on Monday.

Domestic debt is projected at 10.6% of GDP in 2017 and foreign debt at 4%. In 2018, domestic debt and foreign debt are planned at 11.3% and 3.6% of GDP, respectively, and in 2019, at 11.7% and 3.6%, respectively.

“The debt policy that was conducted over the last few years, including measures to develop the domestic debt market, has favored stabilization of spending on servicing of the Russian Federation state debt to a significant extent,” the ministry said.

“It is expected that while its amount will rise gradually in the planned period, it will not exceed 1% of GDP with an expected average growth rate of state debt at 0.6% of GDP, which is lower than growth of the economy expected at 1.5% of GDP annually.”

The net foreign borrowing in securities will be negative during the period. Foreign debt repayment will exceed borrowing by 21.2 billion rubles in 2017, by 60.1 billion rubles in 2018, and by 12.2 billion rubles in 2019.

The Finance Ministry will mainly place Eurobonds denominated in U.S. dollars in 2017–2019. Cooperation with foreign institutions in bond placement is not ruled out.

The total Eurobond limit for 2017 was earlier set at U.S. $7 billion but the ministry said that it plans to offer $3 billion worth of new securities and swap $4 billion worth of the paper in circulation for the new issues.

A possible placement of yuan-denominated OFZ bonds depends on activities of the Chinese regulators.

Loans from multilateral development banks will not exceed $215.4 million annually. The bulk of the loans will be taken from recently established banks, mainly the New Development Bank. The debt portfolios with older banks, such as the International Bank for Reconstruction and Development and the European Bank for Reconstruction and Development are to be reduced.

Gross domestic borrowing will rise to 1.7% of GDP in 2019 from 1.2% in 2016.

The size of OFZ bond placement will be the maximum of the current market capacity in 2017–2019.

“In case of total fulfillment of state domestic borrowing programs, the market volume of state securities will rise by 3.3 trillion rubles to 9.4 trillion rubles by 2019, or from 7.4% to 9.5% of GDP. The increase will amount to 53% over the three-year period, exceeding the corresponding figure in the 2013–2016 period (39%) by almost a half,” the ministry said.

The number of regions with debt exceeding a dangerous threshold of 100% of the region’s budget revenue rising. In 2016, the average level of debt burden of Russian regions stood at 36.4%m which is acceptable.

“But the debt burden of eight of them exceeded 100% of the expected revenue, and the debt burden of 12 of them exceeded 85%, and is likely to top 100% in 2017,” the ministry said.

It said that a high cost of the borrowed funds and a low flexibility of regional budgets creates risks, as the 20 regions account for almost 20% of the combined regional debt, or 446 billion rubles.

Oil price dynamics and geopolitical tensions, which limit access of systemically important companies to foreign debt markets, will remain significant risk factors for the Russian economy. An earlier government decision to freeze the system of state pension savings until 2019 will be an additional factor hurting demand on the national debt market.

Oil prices are expected to be in the range of $40–60 per barrel in the forecasted period.

The ministry also said that international rating agencies “were guided by factors of geopolitical nature” while assigning ratings to Russia similar to those of the Dominican Republic and Costa Rica, while yields of their debt instruments exceed yields of Russian Eurobonds by 150–175 basis points.

By now, only Fitch rates Russia at the investment level of BBB-, while S&P’s rating stands at BB+ and Moody’s at Ba1, both in the speculative range.

(59.3137 rubles – U.S. $1)

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