Forecasting in credit analysis, May 14–15

ACRA affirms BBB(RU) to the Tomsk Region, outlook Stable, and BBB(RU) to bond issues

The credit rating assigned to the Tomsk Region (hereinafter, the Tomsk Region, the Region) is determined by a comparably high level of debt load in relation to operating balance, limited flexibility in budget expenses, and moderate regional economic development compared to the national average.

The Tomsk Region is located in the Siberian Federal District and is home to 1.1 million people (0.7% of the Russian population). In 2017, the Region’s GRP amounted to RUB 511 bln, about 0.7% of the total GRP for all subjects of the Russian federation. Almost one third of the Region’s territory is unpopulated due to the large area of wetlands and forests. The Region is a major educational center and in 2017 ranked second after Moscow in terms of the number of students per 10 thousand inhabitants among Russian regions.

Key rating assessment factors

The Region’s debt load level is average and it needs to refinance more than half of its debt obligations over the next two years. As of the end of 2018, the Region’s total debt exceeded its operating balance by 2.3 times. Despite a significant decrease compared to 2017 (down from 3.5 times), this indicator still indicates a heightened level of risk according to ACRA’s methodology. The deficit stipulated by the current budget law could lead to an increase in debt by 13% by the end of 2019, and 15% by the end of 2021, compared to the current level (as of January 1, 2019). However, at the end of 2019, the debt-to-operating balance ratio, according to ACRA, should not change as the Region’s operating balance is expected grow. As of January 1, 2019, the Region’s current debt repayment schedule assumed the repayment or refinancing of 53% of its debt obligations in 2019-2020, which, together with the need to finance the deficit, may indicate refinancing risks. Interest expenses do not hamper the budget. The final assessment of the Region's debt load at the end of 2019 should correspond to the average level of credit risk. In the medium-term, the debt load and budget indicators will depend on income tax revenues, whose volatility is due to the dynamics of the extraction of mineral resources (the Region’s main contributor to GRP) and related industries.

The flexibility of the Region’s budget expenses is low and the budget depends on its leading industry. The Region’s budget indicators depend on income tax revenue. The volatility of these revenues is due to several factors: regional taxpayers who are part of the consolidated  group of taxpayers (CGT); tax overpayments and subsequent tax refunds (in 2017, these two factors contributed to a 34% decrease in revenues); ruble price dynamics for oil (in 2018, the price was at the maximum level, therefore tax revenues increased by 47% compared to 2017). The regional budget law in 2019 provides for income tax revenues at the same level as in 2018. However, according to ACRA, with a possible decrease in the ruble price of oil amid a reduction in its production in the Tomsk region, actual revenues may be lower than the budgeted level. The share of the Region’s proprietary revenues1 for 2016-2019 should amount to no less than 80%. Mandatory expenditures for this period will be high (around 75% of all budget expenses), and the share of capital expenses should not exceed 12%. The Region’s operating balance should average 20% of its regular revenues, which, along with the Region’s budget expense structure, indicates their low flexibility.

1 Ratio of tax and non-tax budget revenues to total budget revenues minus subventions.

The Region’s economy is dependent on oil production and household income is low relative to the national average. Almost a third of the Region’s GRP (28% in 2017) comes from mining operations, mainly oil. Deterioration in the structure of remaining reserves, the production of highly developed fields, and the increase in the share of hard-to-recover reserves have led to a decline in oil production in the Region over the past five years. GRP per capita and per capita income remain below the national average while unemployment exceeds the national average.

The Region’s budget liquidity is sufficient. In order to finance projected cash gaps, the Region can pull cash both from commercial banks as part of pre-concluded agreements on the opening of credit lines, and from short-term budget loans from the Federal Treasury.

Key assumptions

  • Fulfillment of the planned amount of tax revenues in 2019;
  • A responsible budget policy aimed at realistic revenue planning. 

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 tax base regarding income tax if measures offered by the regional administration to increase the production rates of mature oil fields have a positive economic effect;
  • Fulfillment of the regional budget with a surplus and the use of said surplus to reduce the Region’s public debt;
  • Lower reliance on external sources of liquidity.

A negative rating action may be prompted by:

  • A shift in the Region’s debt book maturity profile towards short-term debt instruments;
  • Lower regular revenues amid stable expenditures in 2019-2021.
  • Non-fulfillment of the action plan aimed at increasing tax and non-tax revenues in 2019–2021, associated with the deterioration of the Region's liquidity.

Issue ratings

Tomsk Region, 34055 (ISIN RU000A0JW1K9), maturity date: June 19, 2023, issue volume: RUB 7 bln — BBB(RU);

Tomsk Region, 34062 (ISIN RU000A0ZYMJ7), maturity date: December 19, 2024, issue volume: RUB 7 bln — BBB(RU).

Credit rating rationale. In ACRA’s opinion, the above bonds issued by the Tomsk Region are senior unsecured debt instruments, and their credit rating is equal to the rating assigned to the Tomsk Region.

Regulatory disclosure

The credit ratings have been assigned to the Tomsk Region and to bonds issued by the Tomsk Region (RU000A0JW1K9, RU000A0ZYMJ7) 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. In the process of credit rating assignment of the above issues, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also used.

The credit ratings assigned to the Tomsk Region and to issues of government securities of the Tomsk Region (RU000A0JW1K9, RU000A0ZYMJ7) were published by ACRA for the first time on April 10, 2018.

The credit rating of the Tomsk Region and its outlook as well as the credit ratings of government securities issues of the Tomsk Region (RU000A0JW1K9, RU000A0ZYMJ7) are expected to be revised within 182 days following the publication date of this press release 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 Administration of the Tomsk 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 Administration of the Tomsk Region participated in its assignment.

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

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

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