Training on Forecasting September 17–18

ACRA assigns A(RU) to the Kursk Region, outlook Stable

The credit rating was assigned to the Kursk Region (hereinafter, the Region) based on medium development of the economy, relatively high fiscal discipline, low debt, and sufficient liquidity of the budget.

The Kursk Region is located in the Central Federal District and borders Ukraine and five regions of Russia. 0.8% of Russia’s population (1.1 mln people) live in the Region. The Gross Regional Product (GRP) amounted to RUB 369 bln in 2016 (it was RUB 335 bln, or 0.5% of the total GRP of Russia).

Key rating assessment factors

The Region’s geographic location determines its economic development. The Region has a relatively low GRP per capita (66% of the average levels in Russia in 2014-2017) and low per capita earned income (84%). The Region’s geographic location (Central Black Earth Region) determines its agrarian specialization: agricultural sector accounts for around 19% of GRP, and around a quarter of the industrial output is food production. In addition, a part of the Kursk Magnetic Anomaly is located in the Region (the Region extracts one sixth of the total annual iron ore production in Russia); on average, mineral production generates 10% of GRP and a quarter of the industrial output. Owing to the Kursk Nuclear Power Plant, the Region generates approximately 13% of the total electric power produced in the Central Federal District, and one third of power generated is consumed inside the Region. Tax revenues are sufficiently diversified (according to ACRA estimates, dependence on the largest taxpayer declines year after year owing to decrease in tax liabilities): the maximum share of one industry (iron ore production) in total revenues amounted to 14% in 2016.

Fiscal discipline is driven by sufficient share of own revenues and support of the agricultural industry by the federal government. The share of own revenues in the Region’s budget is 75% on average (excluding subventions). High share of capital expenditures (20%) is largely due federal subsidies supporting agricultural producers: over 80% of subsidies are provided by virtue of federal funds, that is why the actual buffer for cutting capital expenditures to the benefit of current expenses is significantly smaller. The operating balance accounts for around 22% of regular revenues. ACRA expects fiscal indicators of the Region to stay stable as a result of budget transfer amount adjustments in 2018-2019. Fiscal indicators may be disrupted by the following key risks: increasing gap in the average wage amounts in the Region and in Russia as a whole (considering growing dependence of tax revenues on personal income tax receipts) and declining tax revenues from the mining sector.

Low debt coupled with a conservative debt policy. Although the current debt of the Region is formally short-term (as at August 1, 2017), two thirds of the debt comprise fiscal loans issued in 2014-2015. A third of loans was provided by the Federal Treasury Department. The debt is planned to be refinanced by issuing long-term government securities. Current estimated leverage indicators correspond to the minimum risk category owing to a small debt amount as compared to the operating balance (not exceeding 1.2x as at end 2017) and low interest expenses (below 2% of the operating balance). ACRA expects leverage indicators to rise by 2019 but not exceed the average risk level.

Sufficient liquidity. The Region’s administration has no right to place deposits with banks; however, sufficient liquidity allows for prompt performance of expenditure commitments including interest payments. Current month expenses exceed budget accounts balance as at month start. The Region’s need in short-term liquidity is satisfied by short-term loans from the Federal Treasury Department and by bank loans.

Key assumptions

  • Maintaining conservative debt policy;
  • Maintaining significant federal support of the Region’s agribusiness;
  • Transfer amounts in 2018 and 2019 are comparable to those received in 2017;
  • Mandatory budget expenditures of the Region not exceeding 75%.

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:

  • Growing share of products with high value added and outperforming GRP growth;
  • Increasing number of manufacturing enterprises with high wages, which would drive higher average income per capita and tax revenues of the budget;
  • Increased own liquidity of the budget.

A negative rating action may be prompted by:

  • Changes in debt policy to substantially increase government debt level;
  • Substantial reduction of support of agricultural enterprises by the federal budget;
  • Underperforming salary growth in the Region (lagging behind average growth rates in Russia);
  • Further decline of the absolute amount of tax receipts from the mining industry.

Issue ratings

None.

Rating history

None.

Regulatory disclosure

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.

The credit rating has been assigned to the Kursk Region for the first time. The credit rating and credit rating outlook are expected to be revised within 182 days following the rating action (August 30, 2017).

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

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

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

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