Regional revenue growth is slowing, but still enough to reduce debt

An analysis of regional debt loads and budgets in 2019

  • In 2019, regional debt dropped practically to 2014 levels. Debt reduction amounted to RUB 93.3 bln in total over the past year. 68 regions reduced their debt, 12 regions saw an increase, and in five regions, this indicator has not changed.
  • In terms of debt structure, the share of bonds exceeded the share of bank loans for the first time in a long time, as regional need for the latter has decreased. Due to budget surpluses and accumulated account balances, the total volume of loans decreased by 9% year-on-year, while the placement of bond issues remained at 2018 levels.
  • The cost of loans increased on average. In 2019, the key rate gradually reduced, as well as interest rates on new loan agreements (generally, they are tightly linked to the key rate). Nevertheless, commercial loans in 2019 were more expensive than a year earlier, as the quarterly weighted average spread between the interest and key rates was larger in 2019 than in 2018.
  • Growth in tax and non-tax revenues (TNTR) is now optional for repeated budget debt restructuring. Previously, regions has to show an increase in TNTR at a rate exceeding inflation in order to postpone debt repayment until 2029. This condition no longer applies. In addition, regions may be able to write off part of their debt if they use funds to create new infrastructure.
  • Municipal debt: waiting for new names in the bond market. Bank loans make up most municipal debt. Unlike regions, municipalities are rarely obligated to reduce their debt loads, which in recent years has led to an increase in the nominal amount of their debt, albeit a minor one. However, starting in 2020, the same approaches will be used to assess the debt sustainability of municipalities and regions, meaning large municipalities can enter the bond market to smooth out their debt repayment schedules.
  • The overall surplus remains, although there are more regions in deficit. Last year, the total budget surplus decreased by more than 30x to RUB 15.5 bln, compared to RUB 491.5 bln in 2018. The number of regions in deficit increased by 17 compared to a year earlier. According to ACRA, account balances saw minor increases in 2019.
  • Regional expense growth is financed by the federal budget. Subsidies and other inter-budget transfers provided the majority of revenue increases for regional budgets. The largest increase in expenses was recorded under the “national economy” budget section, which may be linked to financing national projects.
  • Total debt could grow slightly this year. Russian regions (excluding Moscow) are planning for an increase in debt of about RUB 220 bln for 2020. This is a conservative estimate, and the regions’ remaining temporarily available funds are still high. Therefore, there should be no sharp increases in the relative debt load on regional and municipal budgets.

In 2019, regional debt decreased to pre-crisis levels

In 2019, the total debt of Russian regions decreased by 4% (RUB 93.3 bln) compared to the previous year. In nominal terms, its volume is close to 2014 levels (RUB 2.1 tln). The number of regions that reduced their debt increased from 66 in 2018 to 68 in 2019, with a total debt reduction amounting to RUB 151.5 bln. In five regions, debt remained the same in 2019. However, debt increased by a total of RUB 58.2 bln for the remaining 12 regions (Appendices 1-3).

Figure 1. Regional debt decreased for the third year in a row in 2019

* According to Russian Subjects’ budget laws/if the volume of issued guarantees and other borrowings is maintaining at 2019 levels.
Sources: Ministry of Finance of the Russian Federation (Ministry of Finance), Consultant Plus, ACRA

Figure 2. Debt increased for twelve regions in 2019

Sources: Ministry of Finance, ACRA

The Krasnodar Krai and Krasnoyarsk Krai, whose debt levels have been high in recent years, showed the largest decrease in nominal terms in 2019. The Krasnodar Krai repaid RUB 40.7 bln in debt, about RUB 31 bln of which was bank loans, while the Krasnoyarsk Krai repaid RUB 22 bln. The Astrakhan (RUB -8.5 bln) and Samara (RUB -5.4 bln) regions, as well as the Republic of Mordovia (RUB -5.1 bln), are also among the top five in debt reduction.

The largest increase in debt in 2019 was in the Moscow Region (RUB +39 bln). However, due to the high level of this region’s TNTR, its relative debt load amounted to only 34% of TNTR.

The share of bonds increased

For more information, see ACRA’s research project titled “Regional bond market: reasons for stagnation” from February 10, 2020.

In 2019, for the first time in recent years, the share of bonds in the total debt structure slightly exceeded the share of commercial loans (27.9% or RUB 588.5 bln compared to 27.2% or RUB 575.8 bln, respectively). According to ACRA, the increase is due largely to a reduction in bank loans.

Figure 3. Regions repaid bank and budget loans

Sources: Ministry of Finance, ACRA

ACRA notes that the total volume of regional and municipal bond placement in 2019 remained at 2018 levels. Only nine regions and two municipalities entered the public borrowing market in 2019, with the volume of new issues amounting to RUB 92.5 bln. The largest borrower in the bond market was the Moscow Region, which placed two issues totaling RUB 39 bln.

Figure 4. The largest borrowers in the bond market in 2019 (volume of issues in 20191, RUB mln)


1 Not including additional bond issues that were initially placed before 2019.
Sources: cbonds.ru, ACRA

The relative cost of bank loans increased

In 2019, the volume of regions’ bank loans decreased by 9% (RUB 60.2 bln) compared to the previous year. According to ACRA, the weighted average interest rate on loan agreements concluded in 2019 decreased on average by just over 0.3% in annual terms. Since most regions draw up additional agreements to restructure budget loans, the rate on bank loans is linked to the key rate of the Bank of Russia. However, ACRA notes that in 2019, the cost of bank loans relative to the key rate increased2 compared to 2018 and even 2017. According to ACRA, this was due to expectations of an increase in the key rate in early 2019, as well as the difference in the credit quality of the regions that attracted bank loans.

2The quarterly weighted average spread between the interest rate on commercial loans and the key rate of the Bank of Russia in Q1 and Q2 2019 exceeded 1%. ACRA notes that a borrower can reduce its loan rate by entering into an additional agreement with a bank (this fact was not taken into account in the analysis, since it is not subject to mandatory disclosure).

Figure 5. Regions reduced the volume of bank loans in 2019

Sources: Bank of Russia, cbonds.ru, ACRA

As before, Sberbank was the main lender among regional and municipal borrowers in 2019. However, its share in the volume of issued loans decreased by 1% in annual terms and amounted to 83.8% (Table 1).

Table 1. Main creditors of regions and municipalities in 2018-2019

 


Bank
 


Share
 

 


Bank
 


Share
 

2018

Sberbank

84.8%

2019

Sberbank

83.8%

PJSC VTB Bank

4.3%

«Bank Otkritie Financial Corporation» (Public Joint-Stock Company)

4.1%

Bank GPB (JSC)

2.0%

PJSC VTB Bank

2.5%

“SMP Bank” JSC

1.5%

“SMP Bank” JSC

1.4%

Promsvyazbank PJSC

1.2%

JSC “ALFA-BANK”

1.3%

Other

6.3%

Other

6.9%

Sources: Bank of Russia, ACRA

New conditions for the “second stage” of budget loan restructuring

In 2019, the volume of budget loans decreased by 6% (RUB 53.8 bln), which is in line with the terms of the budget loan restructuring agreement from 2017. The agreement also previously provided for a “second stage” of restructuring in which regions, whose TNTR from consolidated budgets in 2018-2019 grew3 faster than inflation, could request the federal government to postpone budget loan repayment until 2029.

At the end of 2019, the conditions for postponing these loans were changed3. According to the new terms, regions will be able to pay 5% of their debt annually in 2020-2024, while the funds freed up by this measure must be used for capital investments to create infrastructure in new investment projects.

Regions then need to repay the remaining budget loans in equal installments in 2025-2029. According to the federal law “On the federal budget for 2020 and for the planning period of 2021 and 2022,” regional debt on budget loans can be written off in the amount of tax revenues received by the federal budget from new investment projects.

Therefore, if the majority of regions decides to restructure under the new conditions, the volume of budget loan repayment in 2020 will not exceed the 2019 level.


3 Taking into account adjustments for a number of excise tax revenues and a decrease in TNTR due to the abolition of movable asset tax.
4 Government Resolution No. 1943, dated December 31, 2019.

Municipal debt: waiting for new names in the bond market

In 2019, municipal debt increased by RUB 8.6 bln (2.3%) to RUB 380.5 bln compared to a year earlier. The nominal amount of municipal debt has been increasing since 2008, but its growth rate has slowed significantly over the past three years. In 2019, municipalities in 51 regions increased debt by a total of RUB 20.3 bln. However, in 27 regions, municipalities reduced debt by RUB 11.7 bln, and in seven regions, the amount of municipal debt did not change. For comparison, in 2018, municipalities in 47 regions increased debt by RUB 16.3 bln, while municipalities in 31 regions reduced it by a total of RUB 12.4 bln. In 2019, the largest increase in municipal debt was in the Moscow region (RUB +3.2 bln), and the largest decrease was in the Krasnodar Krai (RUB -2.7 bln).

Despite the increase in the absolute amount of debt, its volume relative to total municipal TNTR decreased for the third year in a row. The debt to TNTR ratio stood at 24% for 2019 (2018: 25%, 2017: 27%, 2016: 28%). ACRA expects that with the introduction of a mandatory assessment of the debt sustainability of municipalities, and provided that the tax base is stable, indebtedness will continue to decline.

The municipal debt structure is dominated by bank loans (68% at the end of 2019). Regions do not often issue budget loans to municipalities and placing bonds for small amounts is impractical. In contrast to regions, the weighted average interest rate on bank loans for municipalities did not change much in 2019 compared to 2018 and amounted to 8.3%. At the same time, bank loans are more expensive for municipalities than for regions, mainly given the difference in the credit quality of borrowers.

Figure 6. Borrowing is more expensive for municipalities

Sources: Bank of Russia, cbonds.ru

Budget loans to municipalities increased by RUB 5.6 bln in 2019, amounting to 24% of the total debt structure, while the volume of bonds increased by RUB 3.2 bln to RUB 21.3 bln. In 2019, Novosibirsk and Tomsk entered the bond market, with the former issuing one bond of RUB 5 bln and the latter issuing two bonds, RUB 1 bln and RUB 250 mln (bonds for the general public).

ACRA notes that it would be logical for large municipalities to issue bonds to refinance debt, as this would improve debt sustainability in terms of reducing annual debt repayments and servicing.

The number of regions in deficit doubled in 2019, decreasing the total surplus by 30x

In 2019, as in 2018, regions executed their unconsolidated budgets with a surplus, but the total surplus decreased by more than 30x (RUB 15.5 bln compared to RUB 491.5 bln in 2018). The number of regions in deficit increased from 15 in 2018 to 32 in 2019, while 24 were in surplus in 2018. Seven regions that were in deficit in 2018 executed their budgets with a surplus in 2019.

In 2019, the largest budget deficits were in the Moscow Region and Moscow (RUB 67.5 bln, RUB 54.1 bln, respectively). The largest surpluses were in the Krasnoyarsk Krai (RUB 36.6 bln), the Yamalo-Nenets Autonomous Okrug (RUB 30.4 bln), and the Krasnodar Krai (RUB 28.5 bln).

Table 2. In 2019, 24 regions went from surplus to deficit while only 7 made a reverse transition

Sources: Ministry of Finance, ACRA

Regions used the resulting surplus, as well as funds from regionally established organizations (RUB 91.8 bln), to reduce debt owed to the federal government by RUB 53.8 bln and to Russian credit organizations by RUB 60.2 bln. According to ACRA, account balances increased by no more than RUB 30 bln in 2019, taking into account the reduction in funds placed in deposits by RUB 16.0 bln. In contrast, account balances (excluding Moscow) increased by more than RUB 300 bln in 2018.

Figure 7. Regional surplus management in 2019

Sources: Ministry of Finance, ACRA

Dependence on transfers from the federal budget increased

In 2019, regional revenues increased by 10% (RUB 1.1 tln), while a year earlier their growth was 16% (RUB 1.5 bln) compared to 2017. Federal budget transfers (RUB + 368.3 bln) provided the largest increase in 2019. The increase in transfers was due to a 45% increase in subsidies and a 72% increase in other inter-budget transfers. The share of federal budget transfers, which amounted to RUB 2.5 tln in 2019, increased to 20.5% of total regional revenues. In 2018, this figure stood at 19.2%. At the same time, the share of non-target transfers in regional budgets decreased from 9.5% to 7.7%, as well as their total volume from RUB 1.0 trl to RUB 0.9 tln.

Non-target transfers decreased in 52 regions, with the largest decreases in Moscow, the Moscow Region, and Saint Petersburg (by RUB 27.7bln, RUB 15.6 bln, and RUB 9.4 bln, respectively). The decrease in these regions is due to the lack of non-target transfers for the budget balance in 2019, which were allocated in 2018. Non-target transfers increased in 33 regions, most significantly in Dagestan, the Zabaykalsky Krai, and the Saratov Region (by RUB 6.9 bln, RUB 3.3 bln, and RUB 2.8 bln, respectively).

Figure 8. Transfers accounted for 34% of regional revenue growth in 2019

Sources: Ministry of Finance, ACRA

In 2019, revenues from both income tax and personal income tax increased by 8% year-on-year. Property tax revenues decreased by RUB 49.6 bln due to the abolition of the tax on the movable assets of organizations. Revenues from taxes on goods increased by 19%. This is largely due to an increase in excise taxes on alcohol sales in order to compensate for the losses resulting from the repealed tax on moveable assets mentioned above.

Overall, regional revenues grew more slowing in 2019 than in 2018. Growth slowed both in internal revenues, including revenues from income tax and personal income tax, as well as in transfers. TNTR and non-target transfers increased by 7.6% and 19.3% in 2019, whereas in 2018, these figures stood at 14.9% and 22%, respectively.

Table 3. Regions with the most significant growth and decline in revenues in 2019 (RUB bln)


Most significant decline


Most significant growth
 


Region
 


Increase y-o-y
 


Region
 


Decrease y-o-y
 

Kemerovo Region - Kuzbass*

10.8

Moscow

254.2

Khanty-Mansiysk Autonomous Okrug-Ugra*

9.7

Moscow Region

60.9

Republic of Bashkortostan*

4.0

Saint Petersburg

59.5

Republic of Khakassia**

3.2

Krasnoyarsk Krai

47.2

Kaluga Region***

1.4

Sakhalin Region

45.9

Sevastopol***

1.1

Krasnodar Krai

40.6

Reason for decline in budget revenues:
* Decrease in income tax revenues;
** High base in 2018 because of a significant one-time personal income tax payment;
*** Reduction in transfers.
Sources: Ministry of Finance, ACRA

Regions increased spending on economic development

Expenses under the “national economy” section include budget expenses on roads, transport, agriculture and forest management support, communications and computer science, etc.

Regional budget expenses in 2019 generally grew faster than revenues. Total expenses increased by 15% year-on-year (RUB 1.6 tln), and the most significant (by RUB 456.9 bln) expenses increased under the “national economy” budget section. It accounted for 22% of all regional spending in 2019.

The increase in expenses under this section, as well as the increase in subsidies and other inter-budget transfers in regional budget revenues, may be linked to financing national projects. Spending on education increased by 13% (RUB 287.4 bln) compared to 2018, on social policy by 11% (RUB 263.8 bln), and on health care by 23% (RUB 215.1 bln).

Figure 9. Regional spending structure in 2019

Sources: Ministry of Finance, ACRA

Capital expenses5 increased by 18%, by more than RUB 200 bln, while debt servicing expenses decreased by 5% to RUB 86.1 bln due to a decrease in the volume of regional debt and a decrease in interest rates on loans.


5 For assessment purposes, the amount of expenses for the expense type codes are 241, 243, 400, and 522.

Total debt may grow slightly in 2020

At the request of the Ministry of Finance, regions are obligated to reduce their debt load. Otherwise, they have to repay budget loans ahead of schedule. ACRA believes regions will try to reduce their debt loads this year. However, if the growth of tax revenues slows in 2020, this will become more difficult to accomplish.

According to ACRA, regions (excluding Moscow) are planning on a debt increase of about RUB 220 bln due to planned bond loans (net amount of about RUB 120 bln) and bank loans (about RUB 170 bln). However, ACRA does not expect a real increase in debt in this volume given the conservative nature of initial budget revisions. In addition, regions should be able to finance budget deficits without major borrowing due to significant amounts of temporarily available funds.

Given the abovementioned factors, ACRA does not expect a significant aggregate deficit in 2020, even with the further slowdown in TNTR growth. In ACRA’s opinion, an increase in the absolute amount of debt (with a gradual change in its structure in favor of market borrowing) will not lead to a sharp increase in the relative debt load of Russian regions.

Appendix 1. Regions that reduced debt in 2019 (ranking of reduced absolute amount of debt)

 


Change in debt for 2019,
RUB mln

 


Debt growth for 2019,
%

 


Debt at the end of 2019,
RUB mln

 


Debt/TNTR for 2019,
%

 

Krasnodar Krai

-40 650

-29%

99 519

41%

Krasnoyarsk Krai

-21 917

-21%

81 984

33%

Astrakhan Region

-8 509

-38%

13 696

36%

Samara Region

-5 406

-10%

49 350

33%

Republic of Mordovia

-5 128

-9%

51 089

211%

Vologda Region

-4 955

-24%

15 717

23%

Murmansk Region

-4 671

-25%

14 089

21%

Volgograd Region

-4 069

-8%

47 024

65%

Voronezh Region

-3 537

-11%

27 453

33%

Belgorod Region

-3 295

-10%

29 726

38%

Komi Republic

-2 932

-10%

25 471

33%

Republic of Bashkortostan

-2 709

-17%

13 526

9%

Chuvash Republic

-2 559

-20%

10 350

34%

Lipetsk Region

-2 407

-16%

12 580

26%

Orenburg Region

-2 384

-10%

22 053

30%

Kostroma Region

-2 320

-11%

18 140

90%

Kabardino-Balkarian Republic

-2 274

-22%

8 051

67%

Ivanovo Region

-2 045

-13%

13 765

62%

Tula Region

-1 986

-11%

15 954

24%

Republic of Karelia

-1 798

-9%

18 925

68%

Arkhangelsk Region

-1 578

-4%

33 972

53%

Stavropol Krai

-1 536

-5%

31 414

46%

Republic of Sakha (Yakutia)

-1 461

-3%

49 175

37%

Tver Region

-1 431

-6%

23 180

47%

Saratov Region

-1 417

-3%

46 541

68%

Khanty-Mansiysk Autonomous Okrug-Ugra

-1 400

-10%

13 000

6%

Republic of Tatarstan

-1 326

-1%

93 661

38%

Mari El Republic

-1 294

-10%

11 990

70%

Republic of Khakassia

-1 113

-5%

20 734

98%

Udmurt Republic

-972

-2%

46 043

80%

Omsk Region

-965

-2%

41 476

64%

Chukotka Autonomous Okrug

-853

-8%

9 548

69%

Kirov Region

-848

-3%

24 285

72%

Republic of North Ossetia - Alania

-652

-7%

8 417

70%

Leningrad Region

-651

-19%

2 805

2%

Chelyabinsk Region

-636

-4%

15 978

12%

Zabaykalsky Krai

-625

-2%

26 929

70%

Tyumen Region

-553

-15%

3 024

1%

Republic of Dagestan

-468

-5%

9 328

29%

Yamalo-Nenets Autonomous Okrug

-430

-3%

16 411

7%

Ryazan Region

-423

-2%

22 396

55%

Perm Krai

-418

-2%

18 023

14%

Amur Region

-418

-2%

26 986

56%

Nenets Autonomous Okrug

-400

-20%

1 600

8%

Kaliningrad Region

-388

-2%

21 762

53%

Rostov Region

-387

-1%

28 774

20%

Nizhny Novgorod Region

-354

-0,5%

74 732

51%

Bryansk Region

-352

-3%

9 945

34%

Oryol Region

-310

-2%

17 825

89%

Kursk Region

-304

-3%

8 957

20%

Kaluga Region

-271

-1%

28 473

53%

Karachay-Cherkess Republic

-229

-4%

5 103

80%

Chechen Republic

-192

-4%

4 487

33%

Republic of Crimea

-192

-5%

3 451

7%

Primorsky Krai

-161

-3%

5 042

5%

Penza Region

-158

-1%

20 051

58%

Kemerovo Region - Kuzbass

-139

-0,4%

33 238

26%

Vladimir Region

-135

-3%

3 892

8%

Kamchatka Krai

-134

-3%

3 914

15%

Magadan Region

-114

-1%

14 136

61%

Republic of Ingushetia

-113

-5%

2 026

62%

Novgorod Region

-92

-1%

15 530

66%

Altai Krai

-77

-4%

1 858

3%

Ulyanovsk Region

-12

-0,05%

24 928

53%

Republic of Adygea

-3

-0,08%

3 672

33%

Smolensk Region

-1

-0,005%

29 307

88%

Novosibirsk Region

-1

-0,002%

44 219

35%

Tyva Republic

-0,2

-0,01%

1 984

34%

 

Appendix 2. Regions that increased debt in 2019 (ranking of increased absolute amount of debt)

 


Change in debt for 2019,
RUB mln

 


Debt growth for 2019,
%

 


Debt at the end of 2019,
RUB mln

 


Debt/TNTR for 2019,
%

 

Moscow Region

39 168

30%

167 978

34%

Irkutsk Region

4 696

38%

16 977

12%

Sverdlovsk Region

4 395

6%

77 188

35%

Tomsk Region

3 285

11%

32 279

66%

Khabarovsk Krai

2 827

6%

51 926

65%

Tambov Region

1 859

11%

19 074

79%

Pskov Region

709

4%

17 027

92%

Republic of Kalmykia

659

17%

4 616

79%

Yaroslavl Region

309

1%

37 483

66%

Republic of Buryatia

221

2%

12 219

43%

Jewish Autonomous Region

54

1%

5 311

85%

Altai Republic

19

1%

1 528

34%

Sources: Ministry of Finance, ACRA

Appendix 3. Regions showing no change in 2019

 


Change in debt for 2019,
RUB mln

 


Debt at the end of 2019,
RUB mln

 


Debt/TNTR for 2019,
%

 

Moscow

0

30 000

1%

Saint Petersburg

0

30 100

5%

Sevastopol

0

0

0%

Kurgan Region

0

16 587

83%

Sakhalin Region

0

0

0%

Sources: Ministry of Finance, ACRA

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