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

The credit rating assigned to the Novgorod Region (the Region) is based on the Region's comparably high debt load coupled with irregular debt repayment schedule and low flexibility of budget expenditures, as well as moderate metrics of the regional economy.

The Novgorod Region is located in the North-West Federal District and borders with four other regions of the Russian Federation. 0.4% of the Russian population live in the Region; its gross regional product (GRP) is 0.3% of the total Russian GRP. The main railway and automobile highways connecting Moscow, St. Petersburg and the Baltic countries pass through the territory of the Region.

Key rating assessment factors

Irregular debt repayment schedule and comparably high debt load. As of January 01, 2019, the Region's debt included bank loans and restructured budget loans (about one third and two thirds of the debt, respectively). According to the current debt repayment schedule, 39% of the Region's liabilities (RUB 6.1 bln) are expected to be refinanced in 2H2020, which creates potential refinancing risks. Therefore, the ratio of operating balance less interest payments to debt repayments is currently volatile, and it is expected to be 1.05x in 2020 (in 2019, it will be several times higher). The debt to operating balance ratio was 1.9x in late 2018, and it is expected to be within 2.3–2.5x in 2019–2021 (which indicates an increased risk). The debt service cost is low, as the share of budget loans in the Region's debt structure is high. ACRA notes that in late 2018, the ratio of debt to internal revenues of the Region amounted to 70.5%, which is somewhat lower than the loan restructuring target established by the RF Ministry of Finance. The Region's liquidity is high enough to allow the Region to timely perform its spending obligations including interest payments. To cover possible cash gaps, the Region may borrow short-term loans from the Federal Treasury Office.

Budget flexibility is low, as the share of mandatory expenditures is significant. The regional budget revenues include mainly internal revenues, though the share of budget transfers has grown significantly in 2017–2018 against 2014–2016, which is explained by the growth in other inter-budget transfers. In 2015–2018, the share of internal revenues (without subventions) in the total amount of the Region's revenues averaged to 80%, and it is forecasted by the Agency to be 77% in 2019–2021. In 2015–2018, due to the high share of mandatory expenses (76% on average), the Region's average operating balance amounted to 22%, and the share of capital expenditures was low (10%). ACRA does not expect that the structure of the regional budget revenues and expenditures will change significantly in the mid-term.

Diversified economy with developed chemical industry and a growth potential in the transportation services segment. The largest local enterprise is PJSC Acron, a fertilizer manufacturer that generates about 40% of the total shipped products of the Region's manufacturing sector. The share of tax revenues coming from the local chemical industry was low and varied from 6% to 12% of the Region's total tax revenues in different periods. Other major sectors of the regional economy include construction, whose share will decrease with the completion of the M11 highway project, and transport and communications, whose prospects, on the contrary, will increase after the M11 project is completed. The economic development indicators (per capita GRP, per capita income) are about 84% of the national averages. The rate of unemployment is below the national average. In the long term, the ageing and thinning local population may result in insufficient human resources and, possibly, increased social spending.

Key assumptions

  • The Region's debt policy will remain unchanged with respect to the commercial debt repayment schedule;
  • The operating costs will create headwinds for the operating balance in the forecast period.

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:

  • an improvement in the commercial debt repayment schedule (declining refinancing risk with respect to a substantial share of the debt within one year);
  • a limited growth of mandatory expenditures in 2019–2020.

A negative rating action may be prompted by:

  • growing mandatory expenditures not supported by growing budget revenues;
  • use of short-term loans to refinance the commercial debt.

Issue ratings

No.

Regulatory disclosure

The credit rating have been assigned to the Novgorod 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.

For the first time, the credit rating assigned to the Novgorod Region was published by ACRA on July 27, 2018. The credit rating of the Novgorod Region and its outlook are expected to be revised within 182 days after the rating action date (January 23, 2019) in compliance with the Calendar of planned sovereign credit rating revisions and publications.

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

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

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

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