Here and below, ACRA estimates are based on non-consolidated regional budget data
As of 1H16, regional budget revenues went up by 3% (and dropped by 5% in real terms), while the inequality gap between them became wider still: revenues of the wealthiest 20% of regions grew by 1.7%, while revenues of the poorest 20% of regions grew by a mere 0.3%. In total, since 2012 the gap between regional budget revenues showed a 10% surge. The problem is rooted in the waning share of federal budget transfers.
The disparity ratio was calculated as the ratio of budget revenues per capita of the wealthiest 20% of regions to the poorest 20% of regions
Own revenues are made up of tax related and non-tax related revenues of regions and do not include non-repayable receipts
The difference between own revenues of various regions remains acute and little prone to change: the wealthiest 20% of regions collect 6.8 times higher revenues than the poorest 20%. The escalating growth of this disparity in 2015 was linked to the ruble devaluation, which drove revenue growth in regions with larger export oriented taxpayer shares (the Sakhalin Region, the Khanty-Mansiysk Autonomous District, and the Krasnoyarsk Territory).
As of 1H16, the volume of federal loans to regions dropped by 12%, while their share in budget revenues plummeted by 17% compared to the 20% mark in 1H15 and the 32% mark in 1H09. Provided that the federal tax policy remains unchanged, the share of federal loans in regional budget revenues will keep sliding by 1% annually, which in turn will stimulate an even greater disparity going forward.
In 1H16, the nominal growth of regional budget revenues amounted to 3% compared to 12% the year before. Regions are observing a slowing growth rate of own earnings (6% against 14% in 1H15) and a curtailed volume of federal transfers (by 12% against 1H15).
Tax-related budget revenue structure in 1H16:
In 2016, regional budgets have only two remaining sources of growth: personal income tax (PIT) and excise duties. Growth of excise duties receipts was possible due to a nominal growth of excise duties rates.
An inflow of PIT receipts into the budgets of Moscow and St. Petersburg amounted to an average 11% in 1H16 vs. 1H15, compared to an average 8% in other regions (net of the Crimea). PIT receipts depend on both employment and average wage dynamics. Russia’s employment rate has not changed over the past 12 months; however, in terms of wage growth (5-month period), Moscow and St. Petersburg are staying ahead of the rest of the country.
The forthcoming growth of unreported employment will put pressure on budget revenue performance, since it will force PIT receipts to go down. Considering the fact that additional ways of employing devaluation and import substitution effects were used up in 2015, all available sources of boosting income tax receipts in 2016 have been exhausted.
Total regional expenditures have been climbing more rapidly than revenues, i.e., by 5% in 1H16 against 1H15. The growing expenses are not evenly spread across the board; for instance, since the start of 2016, federal subjects’ spending on education has been almost the same as the year before, while spending on national economies has grown by as much as 12%.
Regional budget expenditure structure in 1H16:
Russia’s regions have been steadily intensifying their social expenditures. As of 1H16, the share of those grew by 18% against 1H15 and amounted to 18% of total expenses. Although social security payments make up almost one fifth of real disposable household income, their influence is hardly noticeable: real disposable household income has been steadily sliding over the past 18 months.
During 1H16, the dynamics of regional capital expenditures has followed a variety of trends, and total growth of this indicator amounted to 8%, or RUB 23 bln. The lion’s share of this increase, a whopping 85%, was secured by Moscow and St. Petersburg, which were jointly responsible for more than half of Russia’s total capital expenditures. Thus, the combined growth of capital expenditures in the two capital regions reached 13%, while the rest of the country contributed a meager 2%, on average. In Moscow, the growth of capital expenditures was accompanied by a 20% plunge of wage-and-salary disbursements. In the other regions, average payroll expenditures have not changed since 1H15. As of today, capital expenditures in non-capital regions make up only 5% of total budget expenditures, and resources that would allow to boost those without a negative impact on operating expenses, are no longer available.
Read more on forecast budget indicators in ACRA report of March 02, 2016 “Regional Budgets to be Saved Again by Public Budget Loans in 2016”
Russia’s regions still manage to maintain an aggregate surplus (net of Moscow’s surplus) and avoid accruing more debt. However, the growing gap between their revenue growth rates and debt loads will inevitably lead to a deficit by YE2016. Another deficit-causing factor will be higher expenditures in the second half of 2016 and an ebbing volume of federal transfers.
As of 1H16, the aggregate debt incurred by Russian regions has not changed year-on-year: the shrinking nominal debt load of the most heavily indebted regions was offset by the growing debt load of the least indebted regions. The only two federal subjects that were able to cut back on borrowing were the Chukotka Autonomous Region and the Jewish Autonomous Region.
Read more about federal subjects’ debt load in ACRA report of June 23, 2016 “Regions Face Higher Cost of Debt And Increased Inequality while Repaying Federal Loans”
Beginning from mid-2013, own revenue growth rates of the most heavily indebted regions (in terms of Debt / Own Revenues ratio) have been steadily falling short of debt accrual rates. Hence, their Aggregate Debt to Aggregate Own Revenues ratios have been deteriorating, putting them in an even tighter financial squeeze.
Cost of federal borrowing by regions amounts to 0.1% annually
In the course of the past 12 months, the share of commercial loans within the regional debt structure has gone down from 57% to 50%, while the commercial debt balance has tapered off by 60 bln RUB. At the same time, since the start of 2016, debt servicing expenditures of federal subjects have gone up by 7% year-on-year. According to ACRA’s estimates, the observed growth was due to expensive bank borrowings that regions took out during a high interest rate period in 2015.
Read more about the outlook for federal subjects’ debt load in ACRA’s report of June 23, 2016 “Regions Face Higher Cost of Debt And Increased Inequality while Repaying Federal Loans”
In the course of this year, against the backdrop of a growing volume of federal loans to regions, the upsurge of their debt servicing costs will decelerate. However, according to ACRA’s estimates, active replacement of commercial loans by federal loans will be petering out by 2017. The need to repay federal loans will force regions back onto the lending market, which in turn will push their weighted average interest rates back into the growth phase.
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