Training on Forecasting September 17–18

ACRA affirms AA-(RU) to the Irkutsk Region, outlook Stable, and AA-(RU) to bond issue

The credit rating assigned to the Irkutsk Region (hereinafter, the Region) is based on the debt load indicators corresponding to the minimum risk levels, as well as high self-sufficiency of the budget and the fast pace of the regional economic development. The credit rating of the Region is limited by a high proportion of mandatory budget expenses and its average economic development indicators.

The Irkutsk Region is located in the Siberian Federal District and borders five other regions of the Russian Federation. The southeastern border of the Region runs along Lake Baikal, which is the world's largest natural reservoir of fresh water. In total, 2.4 million people live in the Region, which gross regional product (GRP) was RUB 1.24 trillion in 2017, according to the Region’s estimates. The key economic sectors are aluminum production, oil and gold production and electric power.

Key rating assessment factors

The credit rating assigned to the Irkutsk Region (hereinafter, the Region) is based on the debt load indicators corresponding to the minimum risk levels, as well as high self-sufficiency of the budget and the fast pace of the regional economic development. The credit rating of the Region is limited by a high proportion of mandatory budget expenses and its average economic development indicators.

The Irkutsk Region is located in the Siberian Federal District and borders five other regions of the Russian Federation. The southeastern border of the Region runs along Lake Baikal, which is the world's largest natural reservoir of fresh water. In total, 2.4 million people live in the Region, which gross regional product (GRP) was RUB 1.24 trillion in 2017, according to the Region’s estimates. The key economic sectors are aluminum production, oil and gold production and electric power.

Key rating assessment factors

Balanced debt policy. By the end of the year, the Region’s debt will amount to nearly half of the operating balance. ACRA believes that the Irkutsk Region can maintain this ratio if mandatory spending does not rise faster than expected. Debt servicing costs are not burdensome thanks to a low level of debt, its diversified structure and balanced repayment schedule. The Region participates in a program of budget loan restructuring and is capable of fulfilling the terms of agreements on restructuring, according to ACRA. As of December 1, 2018, the Region’s debt stood at RUB 12.3 billion, down by one third compared to the start of the year. The Region’s debt was represented by budget loans (59%) and bonds (41%). The structure of the debt at the end of the year will depend on the results of the budget implementation. ACRA expects that the regional budget can be executed with a surplus. The final parameters of the debt will depend on how this surplus will be used (an increase of account balances, or a decrease of the debt amount from a year earlier). The implementation of any of the above mentioned scenarios of using the budget surplus doesn’t affect the final level of the Region’s credit rating.

The actual amount of available liquidity of the Region is estimated to be very high. The Irkutsk Region has no overdue accounts payable.

Flexible budget policy. The Region's budget is characterized by a high level of self-sufficiency. The average share of the regional budget revenues is 86% in 2015-2018, while the average share of mandatory (according to the ACRA methodology) expenditures is 79% of the total budget expenditures. The average annual capital expenditures totaled 13% for the specified period. The bulk of tax revenues is provided by profit tax with its share rising and expected to reach 45% in 2018 compared to 34% in 2015. As far as industrial diversification goes, mineral production contributes to the largest share of tax revenues (more than a quarter). As with most oil-producing regions, oil price fluctuations do not have a negative impact on the Region’s nominal budget revenues thanks to the low ruble exchange rate and, as a result, the high cost of crude oil in the national currency.

Risks of expanded sanctions. The Irkutsk Region accounts for roughly 40% of aluminum production. Despite sanctions and the risks of their expansion, ACRA expects that aluminum production in Russia will grow by 5-7% in 2018. There is currently no negative impact of sanctions on the Region’s budget. The United States postponed the enforcement of sanctions on Russian aluminum producer RUSAL, which prohibit operations with the company, until January 2019. Should US sanctions take effect, ACRA expects that the Region’s budget revenues from taxes paid by RUSAL enterprises will likely fall to 4%.

Fast growing regional economy undergoing significant structural changes.  In 2010–2016, the Region's GRP doubled in nominal terms. The growth in the regional economy was accompanied by major structural changes with a new industry having emerged in the Region, namely crude oil production. The contribution of this industry to the GRP rose from 5.3% in 2009 to 26.2% in 2016. In 2017, 3.7% of all Russian oil was produced in the Region (6th place among oil producing regions in Russia), while in 2008 the Region's share was less than 0.1% of total crude production in Russia (24th place).

Metal production dominates the structure of manufacturing industries (21% of the output in 2017), while production of chemicals and petroleum products accounts for around 17%, paper and paper products 12%, timber processing 13%, and food products 8%.

In 2009-2017, the GRP per capita in the Region increased from 84% to 97% relative to the average Russian level. Despite the fact that per capita personal incomes in the Region decreased from 82% of the national average in 2009 to 70% in 2017 (as per capita incomes grew by 1.6 times against the national average growth of 1.9 times), the personal income tax revenues consistently stood at about 89% against the national average. In ACRA's opinion, the dynamics of tax revenues more accurately reflects the level of well-being of the population in the Region.

Key assumptions

  • The Region will maintain a positive trend for the main types of tax revenues;
  • The Region will continue to control the pace of mandatory spending growth;
  • The Regional budget will be executed with a surplus in 2018.

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:

  • Lower share of mandatory budget expenses;
  • Sustainable growth of the Region’s economic development indicators (particularly, an outstripping increase of personal income and a decrease in the unemployment rate).

A negative rating action may be prompted by:

  • Lower operating balance due to the slump in tax and non-tax revenues coupled with the inability to reduce mandatory spending, or due to an increase in the Region’s mandatory budget expenditures without a proportional growth of budget revenues;
  • Need to significantly increase the debt burden in order to finance the Region’s current expenses should it lack its own revenues.

Issue ratings 

Irkutsk Region Government Bond, 2016, 34001 (ISIN RU000A0JX314), maturity date —  December 25, 2021, issue volume — RUB 5 bln, — AA-(RU).

Credit rating rationale. In ACRA’s opinion, the above bond issued by the Irkutsk Region is a senior unsecured debt instrument, and its credit rating is equal to the rating assigned to the Irkutsk Region.

Regulatory disclosure 

The credit ratings have been assigned to the Irkutsk Region and to the bond issued by Irkutsk Region (ISIN RU000A0JX314) 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 Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied to assign a credit rating to the above issue.

The credit ratings of the Irkutsk Region and of the bond issued by Irkutsk Region (ISIN RU000A0JX314) were published for the first time on June 27, 2018. The credit rating of  the Irkutsk Region and its outlook as well as the credit rating of the bond issue of the Irkutsk Region (ISIN RU000A0JX314) are expected to be revised within 182 days after the rating action date (December 17, 2018) in accordance with the Calendar of planned sovereign credit rating revisions and publications.

The credit ratings were assigned based on the data provided by the Irkutsk Region, information from publicly available sources (the RF Ministry of Finance, the Federal State Statistics Service, and the Federal Tax Service), as well as ACRA’s own databases. The credit ratings are solicited, and the Government of the Irkutsk Region participated in their assignment.

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

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

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