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Russia's credit rating cut to junk

Staff writer ▼ | January 26, 2015
Russia's credit rating has been cut to BB+ by S&P. All ratings below BBB- are considered "junk" because they are below the lowest investment grade. The ratings outlook is negative.
Russia
S&P   Economic growth prospects have weakened
S&P said, "The downgrade reflects our view that Russia's monetary policy flexibility has become more limited and its economic growth prospects have weakened. We also see a heightened risk that external and fiscal buffers will deteriorate due to rising external pressures and increased government support to the economy."

S&P added that, "We anticipate that asset quality in the financial system will deteriorate given the weaker ruble; restricted access of key areas of the economy to international capital markets due to sanctions; and economic recession in 2015."

"On Jan. 26, 2015, Standard & Poor's Ratings Services lowered its long- and short-term foreign currency sovereign credit ratings on the Russian Federation to BB+/B' from BBB-/A-3.

"We also lowered the long- and short-term local currency sovereign credit ratings to BBB-/A-3 from 'BBB/A-2'. In addition, we removed these ratings from CreditWatch, where they were placed with negative implications on Dec. 23, 2014. The outlook on the long-term ratings is negative.

"At the same time, we revised the transfer and convertibility (T&C) assessment on Russia to BB+ from 'BBB-'. We affirmed the long-term national scale rating on Russia at 'ruRussia'.

"The downgrade reflects our view that Russia's monetary policy flexibility has become more limited and its economic growth prospects have weakened. We also see a heightened risk that external and fiscal buffers will deteriorate due to rising external pressures and increased government support to the economy.

"We believe that Russia's financial system is weakening and therefore limiting the Central Bank of Russia's (CBR's) ability to transmit monetary policy. In our opinion, the CBR faces increasingly difficult monetary policy decisions while also trying to support sustainable GDP growth.

"We project Russia's real GDP per capita growth to average less than economies with comparable levels of per-capita income over our 2015-2018 rating horizon.

"We anticipate that asset quality in the financial system will deteriorate given the weaker ruble; restricted access of key areas of the economy to international capital markets due to sanctions; and economic recession in 2015. Asset quality deterioration may not be immediately apparent in reported figures, however, due to temporary measures introduced by the CBR that allow Russian banks to apply more favorable exchange rates when valuing foreign-currency denominated assets and apply more flexible provisioning policies.

"We project that the economy will expand by about 0.5% annually in 2015-2018, below the 2.4% of the previous four years. Balance-of-payment pressures have hit the economy; Russia is experiencing a severe terms-of-trade shock. We nevertheless expect that Russia's current account will remain in surplus over 2015-2018 due to import compression (a consistent drop in import demand).

"We forecast that reserve coverage of current account payments will decline to about three months by 2017, from seven months in 2014.


 

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