Training on sovereign risk credit analysis, October 24

ACRA assigns BBB(RU) to the Komi Republic, outlook Stable

The credit rating assigned to the Komi Republic (hereinafter referred to as the Republic, or the Region) is caused by medium budget discipline, significant growth of property tax receipts versus the planned level, which will be used to tighten debt burden, sufficient budget liquidity, as well as socioeconomic specifics: high share of extractive industry in the gross regional product (GRP).

The Republic is located in the North-Western Federal District and borders with seven other administrative entities of the Russian Federation. Certain part of the territory belongs to the Far North area. About 0.6% of the Russian population live in the Region. In 2015, the GRP of the Republic amounted to RUB 523 billion (0.8% of the aggregate GRP of the Russian regions). Over one-third of the GRP is generated by the extractive industry (oil, gas and coal).

Key rating assessment factors

Dependence of the economy on the extractive sector amid irregular development of territories. The coal, oil and gas extraction industries generate over one-third of the GRP of the Republic. Jointly with the sub-sector "Production of petroleum products," the extractive sector generates two-thirds of the industrial production output of the Komi Republic. A significant differentiation of socio-economic development of extractive and non-extractive areas is characteristic of the Region. Further economic development of the Republic depends on geologic exploration investments as well as on development of other branches of the economy (woodworking, agribusiness).

Budget discipline is driven by a high share of mandatory expenses. The republican budget demonstrates high self-sufficiency of fiscal revenues amid stagnating incomes. Weak sectoral diversification of the economy is reflected in the poorly diversified tax revenues. Stably high mandatory expenses affect the proportion of the operating balance in the regular incomes of the Region. ACRA notes that this proportion was increasing in the period under review and that this trend may continue in the medium term (from 6% on average in 2014-2016 to 17% on average in 2017-2019) in view of the expected optimization of expenses and the measures for higher efficiency of revenue management. Higher property tax receipts in 2017 vs the figures currently fixed in the plan will allow the Republic to cut planned deficit substantially and to slow debt growth. Capital expenditures are about 10% of budget expenses, and they are funded mainly by the republican budget.

High debt burden and possible implementation of the public sector risk. The current debt burden of the Region is high due to a substantial growth in debt liabilities in the previous years. According to ACRA estimates, interest payments will comprise up to a third of the Region’s operating balance in 2017. The aggregate liabilities will be 4 times higher than the operating balance of the Republic (vs 8.8x in 2016). Although bonds with a comfortable repayment schedule prevail in the debt liabilities, currently, more than a third of debt liabilities are expected to be refinanced by the end-2017, including a budget loan to be forcibly prepaid (RUB 4.5 billion). State-owned enterprises, viewed by ACRA as socially important and causing losses, show a significant financial debt, which can potentially be assigned to the republican budget.

Sufficient budget liquidity. The Region’s liquidity position is sufficient to timely cover budget expenses, including interest payments, thanks to a possibility to obtain loans from the Federal Treasury Department. Such loans are regularly applied to cover cash deficiencies, while current monthly expenses regularly exceed monthly budget balances. Jointly with bank credit facilities, this creates a substantial debt turnover (about 100% of budget revenues) but does not boost interest expenses.

Key assumptions

  • Measures aimed at more efficient management of budget revenues and expenses will be successful, and tax revenues will increase in 2017-2019 vs currently planned figures;

  • A new budget loan will be obtained in 2017;

  • Existing long-term budget loans will be replaced with new long-term loans;
  • Short-time loans obtained from the Federal Treasury Department will continue to be applied to cover cash deficiencies.

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:

  • A growing diversification;
  • A GRP growth outstripping the national average;
  • A lower share of mandatory budget expenses;
  • A deficit-free budget and a substantial decline in debt liabilities;
  • A lower dependence of the budget on the external funding sources.

A negative rating action may be prompted by:

  • A failure to implement the measures for more efficient management of budget revenues and expenses as well as Republic’s failure to secure tax revenues in 2017 as expected;
  • Growing interest expenses exceeding the ACRA’s expectations if fiscal loans are to be replaced by market obligations;
  • A weaker financial performance of extractive companies, followed by a decline in budget revenues.

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.

A credit rating has been assigned to the Komi Republic for the first time. The credit rating and its outlook are expected to be revised within 182 days following the rating action (September 1, 2017).

The assigned credit rating is based on the data provided by the Komi Republic, 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 Komi Republic participated in its assignment.

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

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

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