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ACRA affirms BBB+(RU) to the Penza Region, outlook Stable

The credit rating of the Penza Region (hereinafter, the Region) is based on a moderate budget balance, significant debt load in the absence of peaks in commercial debt payment in the short-term, and comparatively low economic indicators.

The Region is located in the Volga Federal District and its GRP is close to 0.5% of the aggregate GRP of all Russian regions. The Region is home to nearly 0.9% of the Russian population.

Key rating assessment factors

Debt due within the next 18 months amounts to around 6%. At the end of 2019, the Region’s debt to operating balance ratio should be about 250%, indicating an increased level of risk. Due to the large share of budget loans in the Region’s debt structure (about 47%), its average maturity is about four years, which is a high indicator. The repayment schedule is comfortable over the next 12 months; operating balance coverage, excluding interest expenses on debt repayment in the current period, is significantly more than 300%. Servicing costs are low at 10% of the operating balance. This indicates a minimum level of refinancing risk within the next 12 months. As of August 1, 2019, the amount of debt has not changed significantly. Over the next 18 months, the share of debt to be repaid (refinanced) is about 6% of the Region’s total debt. However, the Region will refinance a significant amount of commercial loans and part of its budget loans in 2021, which should total 37% of the current debt.

Moderately balanced budget with low flexibility in expenses and high accuracy in forecasting budget revenues. The regional budget is characterized by a moderate share of tax and non-tax revenues (TNTR, 69% for 2016-2019). This limits the Region’s ability to manage its revenue base. The budget’s mandatory expenses are very high at about 79% for the abovementioned period, which leaves little room for budget maneuvering. The Region’s capital expenses are low, averaging 8% of total expenses. However, due to the planned growth of revenues from the federal budget, the share of capital expenses over the next two years may grow to 12-13%. The Region's operating balance in 2016-2019 should be about 20% of regular income. ACRA assesses this figure as below average according to its methodology.

Forecasting the Region's proprietary revenues is highly accurate; in non-crisis years, the discrepancy between actual budget execution and the forecast in the first edition of the budget is about 1%.

Key assumptions

  • Maintaining the average maturity of bank loans at 2-3 years; 
  • Maintaining the share of mandatory budget expenses at around 80%.
  • Executing the regional budget with a deficit of no more than 5% TNTR;
  • Maintaining growth rates of proprietary income at the levels observed in H1 2019. 

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Increase in liquidity;
  • Decrease in mandatory expenses amid increased capital expenses;
  • Significant decrease in absolute debt.

A negative rating action may be prompted by:

  • Substantial decrease in averaged weighted debt maturities, particularly, maintaining the current bank loan repayment schedule until 2020;
  • Substantial shortage of proprietary income amid maintained planned expenses.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been assigned to the Penza Region under the national scale for the Russian Federation based on the Methodology for Credit Rating Assignment to Regional and Municipal Authorities of the Russian Federation, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

The credit rating of the Penza Region was published for the first time by ACRA on September 20, 2018. The credit rating and its outlook are expected to be revised within 182 days following the publication date of this press release as per the Calendar of planned sovereign credit rating revisions and publications.

The credit rating was assigned based on data provided by the Penza Region, information from publicly available sources (the Ministry of Finance, the Federal State Statistics Service, and the Federal Tax Service), as well as ACRA’s own databases. The credit rating is solicited, and the Government of the Penza Region participated in its assignment.

No material discrepancies between the provided data and data officially disclosed by the Government of the Penza Region in its financial report have been discovered.

ACRA provided no additional services to the Government of the Penza Region. No conflicts of interest were discovered in the course of credit rating assignment.

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