Training on Forecasting May 14–15

ACRA upgrades the outlook to “Positive” and affirms A-(RU) for the credit rating of the Ryazan Region

The credit rating outlook of the Ryazan Region (hereinafter, the Region) was revised following a surplus of RUB 4.1 bln recorded by the regional budget in 2017, which enabled cutting the market debt by 7% and its short-term portion by 70% as well as based on improved expectations for the Region’s economic growth in 2018-2020.

The Ryazan Region is part of the Central Federal District. 48% of the Region’s population live in its administrative center, the city of Ryazan. The Region borders Vladimir, Nizhny Novgorod, Penza, Tambov, Lipetsk, Moscow, and Tula Regions and the Republic of Mordovia. The Region’s GRP is close to 0.5% of the total GRP of Russian regions. Around 0.8% of country’s population live in the Ryazan Region.

Key rating assessment factors

A diversified economy with relatively low unemployment and a per capita income below the national average. The core of the Region’s economy is manufacturing industry (crude oil refining, military machinery, food processing, and construction materials production). High industry diversification of the economy has a positive effect on the diversification of the Region’s tax revenues. Tax revenue structure by revenue type is stable. Average growth rates of the real GRP of the Region in the last six years exceeded the aggregate GRP growth rates of all Russian regions. However, in 2014-2015, the Region was among 46 regions that faced recession due to which its GRP growth was slower than the national average figures. Migration inflow does not compensate for natural population decline resulting in continuous depopulation of the Region.

A well-balanced budget with a sufficient share of own revenues and high level of mandatory spending. The Region’s budget is marked by a sufficient share of tax and non-tax revenues (78% on average) providing many opportunities for the Region for managing its own revenue base. The set of measures taken by the regional administration, which are aimed at encouraging investments, are likely to help increase the scope of taxable activities in the long term. The high share of mandatory spending in the budget (around 80%) leaves few options for budget maneuvering. The Region maintains sufficient level of own capital expenditures (9%-10% of total spending). By virtue of a relatively flexible expense side of the budget, the Region’s operating balance is moderate or slightly below moderate (16%-23% of regular revenues). A stress test performed by ACRA shows that credit quality of the Region is moderately sensitive to own revenue fluctuations. The current quality level is immune to a negative scenario where tax and non-tax revenues decline by 9-10 per cent vs the projected figures.

Moderate debt load of the Region’s budget and high share of fiscal loans in the debt portfolio. Total debt to operating balance ratio at over 200% corresponds to an increased risk level. At the same time, the absolute debt amount of the Region would continue declining according to ACRA's base case scenario. In addition, as the share of fiscal loans in the Region’s debt portfolio is very significant (over 50%), the effect from restructuring of fiscal loans performed in late 2017 was very noticeable in the debt load indicators. The average repayment period increased to 4.1 as at early 2018. At the same time, the effective interest rate for the portfolio dropped from 4.2% as at early 2017 to 3.6% as at early 2018. A comfortable repayment schedule (operating balance less interest expenses to cover current-month debt repayment amount by more than 400%) and debt servicing costs (less than 10% of the operating balance) are indicative of the minimum refinancing risk.

High liquidity of the budget. Monthly needs of the Region in funds may be from time to time covered exclusively by account balances as at month start. No funds are placed into bank deposits. From time to time, the Region raises funds from the Federal Treasury Department to finance planned cash gaps. The Region has enough freedom in using external liquidity sources to manage account balances and undertake expenditures in both planned and unexpected cash gaps.

Key assumptions

  • Substantial share of manufacturing enterprises in GRP’s structure is maintained;
  • Progressive decrease in interest rates with respect to the Region’s market debt;
  • Maintaining the share of the budget’s mandatory spending below 83%. 

Potential outlook or rating change factors

The Positive outlook assumes that the rating will most likely change within the 12 to 18-month horizon. A positive rating action may be prompted by:

  • Household income and real GRP growth outpacing the national averages;
  • An increase of own liquidity level and decreased frequency of planned cash gaps;
  • A lower debt to operating balance ratio.

A negative rating action may be prompted by:

  • A significant shortening of time to maturity for debt obligations;
  • Debt load (debt to operating balance ratio) growth above 3x.
  • A substantial growth of mandatory spending of the budget without a corresponding growth of tax and non-tax revenues of the Region.

Issue ratings

None.

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.

For the first time, the credit rating of the Ryazan Region was published on October 16, 2017. The credit rating was affirmed and its outlook was revised on April 11, 2018. The credit rating of the Ryazan Region and its outlook are expected to be revised within 182 days after the rating action date (in compliance with the 2018 calendar of planned sovereign credit rating revisions and publications).

The credit rating was assigned based on the data provided by the Ryazan 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 Ryazan Region Government participated in its assignment.

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

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

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