ACRA affirms BBB-(RU) to the Kostroma Region, outlook Stable

The credit rating of the Kostroma Region (hereinafter, the Region) is based on its high debt load, limited flexibility of budget expenditures and weak economic indicators as compared to the national average. The credit rating is supported by a smooth debt repayment schedule forecasted until 2023.

The Kostroma Region is located in the Central Federal District. The Region’s population is nearly 0.4% of the total Russian population. The gross regional product (GRP) of the Region is around 0.2% of the aggregate GRP of all Russian regions.

Key rating assessment factors

High debt load with a smooth debt repayment schedule. By the end of 2018, the ratio of debt to operating balance stood at 4.7x (it is forecasted at 4.2x by late 2019). The current debt repayment schedule (as of April 1, 2019) suggests that the annual share of debt that needs to be refinanced will not exceed 10% of the total debt in the next four years. In 2023, the Region is to refinance almost half of its debt, most of which are long-term bank loans. In 2018, the Region’s debt decreased by 7%, while the ratio of debt to tax and non-tax revenues (TNTR) fell from 135% to 115%. Under the agreements with the Ministry of Finance of Russia, the Region’s debt should not exceed 100% of its own revenues by 2020. According to ACRA estimates, the Region will be able to fulfil this.

Low flexibility of budget expenditures, dependence on federal transfers. In 2018, the Region received a significant amount of transfers that have not been provided to it before (a transfer for partial compensation of additional expenses for raising salaries of public sector employees and other purposes), which allowed the Region to end the past year with a surplus. In 2019, the transfer will also be provided with the share of transfers for capital expenditures rising significantly. Hence, the Region’s budget indicators are largely dependent on the federal funds. Due to the growth of transfers, the share of own revenues (less subventions) will decrease from 73% in 2016 to 58% in 2019. The share of mandatory expenditures in the budget is high (73%), which indicates low flexibility of budget expenditures.

Starting from 2018, the Region’s budget is supervised by the Federal Treasury. ACRA notes that the treasury supervision regime regulates budget expenditures, but it is not aimed at higher budget revenues. Therefore, the Agency is neutral about the outcome of the treasury supervision regime in respect of regional budget expenditures

Weak but diversified economy. The regional economy is dominated by woodworking, metals, jewelry, food, and electricity industries. At the same time, the GRP per capita and per capita income are low: 53% and 76% of the national average in 2015–2017 respectively.

Key assumptions

  • The transfer to compensate growing expenditures for higher public sector salaries and other purposes is not fixed income of the Region;
  • In 2019-2020, the Region will comply with the budget loan restructuring rules, set by the agreements with the Russian Ministry of Finance in 2017.

Potential outlook or rating change factor

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 sustainable deficit-free budget (less one-off transfers);
  • A decline in the ratio of debt to operating balance down to 3х and below.

A negative rating action may be prompted by:

  • Higher share of mandatory budget expenditures, and the operating balance going below 12% of regular revenues;
  • Budget deficit that requires financing via increased relative debt load;
  • A breach of the budget loan restructuring rules, entailing partial prepayment of the debt and an increase in interest expenses.

Regulatory disclosure

The credit rating was assigned to the Kostroma Region 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.

For the first time, the credit rating of the Kostroma Region was published by ACRA on October 12, 2017. The credit rating of the Kostroma Region and its outlook are expected to be revised within 182 days following the publication date of this press release in compliance with the Calendar of planned sovereign credit rating revisions and publications.

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

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

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

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