ACRA Trainings on Credit Analysis

ACRA assigns AA-(RU) to the Perm Krai, outlook Stable

The credit rating assigned to Perm Krai (hereinafter, the Region) is based by the minimum risk of debt load and the high self-sufficiency of the budget revenues. A sufficiently flexible budget policy and a balanced debt policy support the rating. The rating is restricted by a relatively low share of the development budget (capital expenditures) in the total budget expenditures and the economic development indices (per capita), not exceeding or lower than the national average figures.

The Perm Krai is located in the Volga Federal District. The population is 2.63 million people, of whom 1.18 million live in the Perm agglomeration.

Key rating assessment factors

Industrialized regional economy is based on oil production and refining, chemical industry and manufacture of various types of equipment. The per capita GRP and per capita incomes are at the level of 91% and 99% of the average Russian indicators, respectively (according to actual data for 2014-2015 and estimates for 2016-2017). The largest taxpayer in the Region is PJSC "LUKOIL" (including its subsidiaries), which owns oil production and refining assets, and oil products sales assets. For a long time, the Region provided tax benefits for almost all organizations operating in its territory, but since 2016 it has gradually increased the regional tax rate (in 2018 it should reach the all-Russian level). The Region will continue to provide tax benefits to organizations that carry out investment projects in its territory.

Flexible budget policy. Tax and non-tax revenues account for about 86% of total revenues, excluding subventions (according to actual figures for 2014-2016 and forecast data for 2017), which indicates a high degree of self-sufficiency of budget revenues. On average, tax and non-tax revenues include 39.6% of income tax revenues and 31.7% of personal income tax revenues.

In 2014-2015, the operating balance (as a percentage of regular revenues) was low (less than 9%). However, the real budget flexibility was significantly higher. When the actual budget revenues (excluding increased gratuitous receipts distributed within the year) turned out to be significantly lower than originally planned (by 12.4% in 2014 and by 4.7% in 2015), the Region proportionally maneuvered its budget expenditures. As a result, the actual deficit was lower (or significantly lower) than the originally approved figures. Thus, in 2014, the actual deficit of RUB 1 billion was less than the initially approved one, and in 2015 and 2016, the difference amounted to RUB 6.2 billion and RUB 7.2 billion, respectively. Such budget policy has allowed the Region to avoid an excessive growth in the debt load and, as a result, to prevent a significant increase in the debt service costs. According to ACRA estimates, in 2017, the operating balance (as a percentage of regular revenues) will exceed 17%. The share of capital expenditures (development budget) has increased from 11.6% in 2014 to about 20.8% (estimate) in 2017.

Well-balanced debt policy. In the period from 2011 to 2017, the highest budget deficit of RUB 11.2 billion, or 14.8% of tax and non-tax revenues, took place in 2013, and it was financed by the financial reserves of the Region. As a result, until January 01, 2014, the direct debt was insignificant (less than RUB 0.5 billion).

As of January 1, 2017, the direct debt of the Region was RUB 20.97 billion, the net debt (net of budget account balances) was RUB 15.34 billion. Direct debt consisted of bank loans (55%) and budget loans (45%). Approximately 69% of the net debt was a result of budget deficit financing in 2014. The debt servicing costs corresponds to the minimum level of risk.

More than RUB 8.2 billion of budget loans (65% of the budget loan arrears as of October 1, 2017) fall under the restructuring of 2017. The amount of guarantees issued is insignificant (RUB 27 million), similar to the municipal debt (RUB 295 million as of January 01, 2017).

High liquidity allows the budget to save on debt servicing costs. In 2017, the Region has fully repaid its bank debts (by October 01, 2017, the debt decreased by RUB 12.6 billion, and the net debt equaled to RUB 9.78 billion). The repayments were made using the remaining budget funds (RUB 5.67 billion in early 2017) and the current budget surplus (which exceeded RUB 9 billion in the 10 months of 2017). As a result, the debt service savings of the Region will amount to at least RUB 700 million in 2017. If case of need, the Region may increase the debt by end-2017, through bank loans under the existing revolving credit lines.

Key assumptions

  • Debt policy and liquidity management policy to remain unchanged;
  • 2017–2018 budget deficit not to exceed 2% of the tax and non-tax revenues or budget surplus;
  • Participation in the budget loans restructuring program;
  • The GRP to grow in 2017–2019.

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:

  • Personal incomes outpacing the national average;
  • A substantial increase in the share of development budget (capital expenditures) in the budget.

A negative rating action may be prompted by:

  • Shrinking operating balance;
  • A substantial increase in debt load and debt servicing costs.

Issue ratings

None.

Rating history

None.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings 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 has been assigned to the Perm Krai for the first time. The credit rating and credit rating outlook are expected to be revised within 182 days following the rating action date (November 30, 2017).

The credit rating was assigned based on the data provided by the Perm Krai, 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 Perm Krai Government participated in its assignment.

No material discrepancies between the data provided and the data officially disclosed by the Perm Krai in its financial reports have been discovered.

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

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