Bashkortostan special report: Macroeconomic focus - Upward trajectory
Prudent fiscal policies and strong fundamentals earned Bashkortostan investment-grade status from the world’s leading rating agencies in 2013.
Bashkortostan’s economy remained one of the best-performing in the Russian Federation last year. Gross regional product (GRP) grew by an estimated 3.5%, more than double the national level of 1.5%, while industrial growth was also ahead of the average for Russia’s regions at 2.3%. The Republic’s key industries of oil refining and agriculture expanded by 4.5% and 17% respectively, while parts of the machine-building sector – notably in the aviation equipment sphere – showed growth of up to 50%.
This in turn helped boost tax revenues by 6.7%, allowing the regional government to increase capital expenditure by around 5%. That equated to 24% of total expenditure, a substantial increase on the level of 15.9% recorded in 2010.
These strong results continued a recent trend of outperformance by the Republic. Since 2010, Bashkortostan’s economy has grown by nearly 25%, despite continuing uncertainty in global markets and weakness across Europe, and in 2012 GRP passed the R1 trillion ($28.1 billion) mark for the first time.
This rapid expansion has contributed to a steady decrease in unemployment in the Republic, which fell from a high of 9% in 2010 to just 6% of the total workforce by the end of December 2013, according to Standard & Poor’s. The rating agency expects this downward trend to continue, forecasting a level of 5.6% for the jobless rate by the end of 2015.
More impressively, the decrease in unemployment and growth in the economy has been achieved without any concomitant increase in inflation, which fell to a post-Soviet low of 6.2% in 2012 and has since remained at that level.
Bashkortostan is also one of the few Russian regions to boast favourable demographics. While population levels across most of the country have declined over the past five years, the Republic has seen the number of its citizens stabilize at around 4.07 million over the same period and even show a modest increase of 60,000 in 2013.
These strong fundamentals prompted leading international ratings agencies Moody’s and Standard & Poor’s to upgrade Bashkortostan to investment-grade status in 2013.
S&P was the first to act, boosting the Republic’s rating by one notch to BBB- on 30 April. Moody’s mirrored that move on 27 June, changing its Ba1 rating to Baa3. Both agencies have assigned a stable outlook to their current ratings.
Bashkortostan’s low debt and high liquidity were key drivers for both ratings upgrades. Moody’s noted that at end-2012 the Republic’s net direct and indirect debt was at historically low levels, comprising just 12.4% of operating revenue. The debt structure is well balanced, with low-interest federal loans comprising 33% of the total, bank loans 36% and ruble bonds 22%. Interest expenses are low, accounting for barely 1% of overall operating revenue.
Moody’s added that Bashkortostan’s liquidity position was the best of any Russian region, with cash reserves totalling R20 billion or around 28% of operating revenue. That level is forecast to remain stable through to at least the end of 2015, according to a November research note from S&P, thanks to the Republic’s "robust internal cash flow generation capacity".
Standard & Poor’s also noted in November that Bashkortostan is expected to continue to outperform the Russian average in terms of GRP growth during 2014 and 2015.
Both ratings agencies gave much of the credit for the Republic’s elevation to investment-grade status to the regional government. Standard & Poor’s commended policy-makers’ "commitment to conservative spending" and noted that deficits after capital accounts are expected to remain at a manageable 7-8% for the next two to three years.
The agency added: "We expect Bashkortostan to continue its prudent control over expenditures and maintain relatively sound financial performance, despite growing pressure from the need to raise spending on public sector salaries and maintain and develop infrastructure."
Moody’s also noted that the Republic’s fiscal management continued to evolve towards greater predictability in key indicators, thanks to the implementation of three-year budgets, adequate budget planning and a moderate spending policy.
In its June ratings report, the agency added: "Going forward, we expect that Bashkortostan will maintain stable operating margins alongside its enhancing tax revenue base, conservative budget management and still favourable oil prices."
The upgrades confirmed Bashkortostan’s position in the top tier of Russian regions. Moody’s has investment grade ratings on only three other sub-sovereign entities in the country – Moscow, St Petersburg and Khanty-Mansiysk – while Standard & Poor’s has assigned triple-B ratings to five regions.