ACRA affirms Kursk Region’s credit rating at A(RU), outlook Stable, and affirms bond issues credit rating

The credit rating of the Kursk Region (hereinafter, the Region) is based on medium development of the economy, relatively high fiscal discipline, low debt load, 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 Region’s GRP amounted to RUB 369 bln in 2016 (it was RUB 335 bln, or 0.5% of the total GRP of Russia). The Region is part of the Central Black Earth Region. A part of the Kursk Magnetic Anomaly is located in the Region.

Key rating assessment factors

The Region’s geographic location determines its economic development. Although low GRP per capita and moderate per capita income (around 69% and 85% of the national average figures for 2014-2017) limit the Region’s economic development, the Agency notes the emerging positive trend these indicators demonstrate. The Region’s economy is regarded as diversified: Agricultural sector and the related food production industry generate 20% of GRP and a quarter of the industrial output, respectively; on average, mineral production generates 10% of GRP and a quarter of the industrial output; power generation accounts for 8% of GRP and 20% of the industrial output. Tax revenues are recognized as relatively diversified, although revenues from a single industry (iron ore production) are increasing: the share of revenues equaled 23% in 2017 vs 14% in the previous year.

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 averaged 75% of total revenues (excluding subventions) in 2014-2017. High share of capital expenditures is largely due to federal subsidies supporting agricultural producers, which the Region has no independent control over and constituting no reserve for cutting capital expenditures in favor of the current expenses. As a result, the operating balance that accounted for around 25% of regular revenues in 2014-2017 is largely dependent on the amount of federal support.

Low debt coupled with a conservative debt policy and a comfortable debt repayment schedule. The Region placed a bond issue and restructured its fiscal loans in 2017; as a result, 70% of its debt are long-term borrowings with a comfortable repayment schedule. The rest of the debt is a short-term loan provided by the Federal Treasury Department and refinanced with banks. The current debt load in the Region’s budget corresponds to the minimum risk. The debt and interest payments are unburdensome. According to ACRA estimates, the Region would be capable of complying with the terms and conditions of the agreements with the Ministry of Finance providing for no increase of its debt load.

High 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

  • The conservative debt policy is maintained.
  • Maintaining significant federal support of the Region’s agribusiness;
  • Transfer amounts in 2019 and 2020 are comparable to those received in 2017 and planned for 2018;
  • Mandatory budget spending of the Region does not exceed 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 public debt level;
  • Substantial reduction of support of agricultural enterprises by the federal budget, or changes in the share of subsidies provided by the federal and regional budgets;
  • Underperforming salary growth in the Region (lagging behind average growth rates in Russia);

Issue ratings

The Kursk Region, 35001 (ISIN RU000A0ZYCD1), redemption: October 12, 2025, issue volume: RUB 4 bln. — А(RU).

Rationale. In ACRA’s opinion, the above bond issued by the Kursk Region is senior unsecured debt instrument, and its credit rating is equal to the rating assigned to the Kursk Region.

Regulatory disclosure

The credit ratings have been assigned to the Kursk Region and to bond issued by the Kursk Region (ISIN RU000A0ZYCD1) 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 to the above issue, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also used.

For the first time, the credit rating of the Kursk Region and credit rating of government securities of the Kursk Region (ISIN RU000A0ZYCD1) were published by ACRA on September 1, 2017 and on October 10, 2017, respectively. The credit rating of the Kursk Region and its outlook as well as the credit rating of government securities issues of the Kursk Region (ISIN RU000A0ZYCD1) are expected to be revised within 182 days after the rating action date (February 28, 2018) in compliance with the 2018 calendar of planned sovereign credit rating revisions and publications.

The credit ratings were assigned and affirmed 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 ratings are solicited, and the Kursk Region Administration participated in their 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 Administration. No conflicts of interest were discovered in the course of credit rating assignment.

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