ACRA affirms BBB-(RU) to the Kostroma Region, outlook Positive

The credit rating of the Kostroma Region (hereinafter, the Region) is based on the Region’s high debt load, declining share of internal revenues, limited budget liquidity, and weak economic development indicators.

The credit rating outlook reflects ACRA’s expectations regarding the Region’s debt load stabilizing below 65% of current income in 2020 and limited need for debt financing amid declining budget income.

The Kostroma Region is located in the Central Federal District. The Region’s is home to around 630,000 people (0.4% of Russia’s total population). According to the Region, its gross regional product (GRP) will amount to RUB 182 mln for 2019 (around 0.2% of the aggregate GRP of all Russian regions).

Key rating assessment factors

Lower internal revenues will be compensated by growth in transfers. The Region’s budget law1 assumes 4% growth (+RUB 0.7 bln) of tax and non-tax revenues (TNTR) in 2020. When coupled with significant (15%) growth of transfers (+RUB 2.3 bln) compared to 2019, this increases the income part of the Region’s budget by 9% (+RUB 3.1 bln) compared to the year before. Growth of expenditures by 19% (+RUB 6.3 bln) compared to the indicator for the previous year is expected. The Region plans to finance its budget deficit, which amounts to 4% of TNTR (RUB 0.9 bln), primarily by using accumulated liquidity and thereby avoid significant growth of debt.

Based on the Region’s budget execution data for the first six months of this year, ACRA predicts that the Region’s tax revenues will decline in 2020, which should impact expenditures. ACRA assumes that the end-of-year deficit may be higher than the target and will be financed including by increasing debt.

In ACRA’s opinion, the ratio of the balance of current operations to current income should fall to 11% in 2020, which is much lower than the indicator for 2019 (23%). The averaged indicator2 for 2017–2021 should equal 16% and remain at a moderately high level.

The share of capital expenditures in the Region’s total expenditures is assessed as high. The averaged value for this indicator in 2017–2021 should amount to around 27%. The averaged indicator of the share of TNTR in income (excluding subventions) should amount to 63% in the studied period.

The averaged ratio of the modified budget deficit to current income should be just below zero for 2017–2022, which means the Region has a growing need to raise a small amount of debt financing.


1 Kostroma Region Law No. 632-6-ZKO (amended on July 7, 2020) “On the Regional Budget for 2020 and Planned Period of 2021 and 2022” dated December 23, 2019 2 Hereinafter, averages are calculated according to the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation.

The high debt load is offset by low refinancing risks. The Region’s debt has practically remained unchanged over seven months of this year and amounted to RUB 18.139 bln as of August 1, 2020. The structure of the debt portfolio is also unchanged: budget loans account for 62% of debt, while bank loans account for 38%.

The peak of debt repayments (48% of debt) falls in 2023. In the remaining part of 2020, the Region has to repay RUB 1.2 bln (7% of debt), however, ACRA expects that the Region will be exempted from repaying budget loans. In the next three years the Region has to repay more than 37% of its debt according to the current budget loan restructuring schedule.

As of the end of 2019, the ratio of debt to current income was 60%. ACRA expects this indicator to grow slightly to 62% by the end of 2020 in connection with the possible decline in TNTR. However, the ratio of debt to TNTR may exceed 100% in 2020.

The Region’s interest expenses are not burdensome: the averaged level of interest expenses in 2017–2021 amounted to around 2% of total budget expenditures (excluding subventions).

Starting from 2019, balances on the Region’s accounts covered no more than 36% of its monthly budget expenditures on average. The Region’s budget law stipulates that most free liquidity will be used to finance possible deficits.

As of August 1, 2020, the Region does not have any undrawn credit lines. The use of loans from the Federal Treasury Department and autonomous and state-financed institutions will allow the Region to avoid possible cash gaps.

Weak but sufficiently diversified economy. The regional economy is dominated by the wood processing, metal, jewelry, food, and electricity industries. According to ACRA’s assessments, the largest share of tax revenues (around 12%) is contributed by enterprises responsible for the supply of electricity, gas, steam, and water. Industries that are part of the state-owned sector of the economy provide about 20% of tax revenues.

GRP per capita is low (around 50% of the national average). The ratio of averaged wages to the regional subsistence minimum exceeded 200% in 2016−2019. Averaged unemployment totaled 4.5% for the same period.

Key assumptions

  • TNTR 8% lower than the 2019 indicator;
  • Lower budget expenditures and income;
  • Transfers to the regional budget no lower than planned;
  • Execution of the 2020 budget with a deficit of no more than 10% of TNTR;
  • Growth of debt in 2020 of no more than 5% compared to 2019.

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:

  • Sustainable growth in budget liquidity;
  • Maintaining a positive modified budget deficit;
  • Sustainable debt to current income ratio no higher than 65%.

A negative rating action may be prompted by:

  • Sharp growth in short-term debt;
  • Sharp growth in the need for debt financing.

Issue ratings

None.

Regulatory disclosure

The credit rating has been assigned to the Kostroma Region 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 of the Kostroma Region was published by ACRA for the first time on October 12, 2017. The credit rating of the Kostroma Region and its outlook are expected to be revised within 182 days following the publication date of this press release as per the Calendar of planned sovereign credit rating revisions and publications.

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

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

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

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