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ACRA affirms A-(RU) to the Ryazan Region, outlook Positive

The credit rating of the Ryazan Region (hereinafter, the Region) is based on the Region’s low relative debt load, medium flexibility in budget structure, and high budget liquidity. The outlook is based on the expectation that the Region will refinance the short-term part of its debt and change its debt repayment schedule. The debt repayment schedule currently assumes the repayment of more than half of the Region’s debt over the next two years.

The Ryazan Region is part of the Central Federal District. About half of the Region’s population lives in its administrative center, the city of Ryazan. The Region’s GRP is close to 0.5% of the total GRP of all Russian regions. Nearly 0.8% of the country’s population lives in the Region.

Key rating assessment factors

Well-balanced budget with sufficient proprietary revenues and a high level of mandatory expenses. The Region’s budget is marked by a sufficient share of tax and non-tax revenues (TNTR) averaging 77% in 2016-2018 and according to confirmed values for 2019. This provides the Region with many opportunities to manage its own revenue base. The high level of mandatory budget expenses (72-80% in 2016-2018) leaves few options for budget maneuvering. At the same time, the Region maintains its own capital expenses at 9-11% of total expenses (approximately half of the Region's capital expenditures are financed at its own expense). The Region’s operating balance averages 25% of regular revenues because of relatively flexible budget expenses. The current credit quality level is immune to a negative scenario, implying a decline in TNTR by 5% compared to the projected level.

Low credit risk and high share of budget loans in the debt portfolio with an uneven debt repayment schedule. The Region’s debt to operating balance ratio has declined over the analyzed period. ACRA expects this ratio to reach 170% for 2019, an average level of risk for this indicator. At the same time, according to ACRA’s base forecast, the absolute value of debt should decrease slightly. Nevertheless, due to the growth of TNTR in 2019, the debt to TNTR ratio should continue to decline, which would allow the Region to exceed the terms of budget loan restructuring. Since the share of budget loans in the Region’s debt portfolio is large (about 60%), the average effective interest rate on the debt is at a low level (3% as of September 1, 2019). Interest expenses are not burdensome and account for 5-6% of the operating balance for 2017-2019. The ratio of operating balance after deducting interest expenses to the volume of debt repayment in 2019 is many times higher than the safe level. This is because the repayment of commercial debt does not fall on the current year. The next scheduled commercial debt repayment will take place at the end of 2020 (44% of Bank loans). As a result, this ratio will worsen in 2020. ACRA assumes that during 2019, the Region will make efforts to increase the maturity of part of the commercial debt, which will allow the Region to maintain minimum refinancing risk at the beginning of 2020. Cumulatively, the debt load indicators correspond to a low level of credit risk.

High budget liquidity. The Region’s monthly funding needs may periodically be covered exclusively by account balances at the beginning of each month. No funds are placed into bank deposits. The Region at times has raised funds from the Federal Treasury to finance planned cash gaps. However, there has been no need for this in 2019. The Region has sufficient freedom in using external liquidity sources to manage account balances and undertake expenses for both planned and unexpected cash gaps.

Diversified economy with relatively low unemployment and per capita income below the national average. The manufacturing industry forms the core of the Region’s economy (i.e., oil refining, military machinery, food processing, and production of construction materials). The economy’s high industry diversification has a positive effect on the diversification of the Region’s tax revenues. Tax revenue structure by revenue type is stable. The average growth rate of the Region’s real GRP has been lower than the aggregate GRP growth rate of all Russian regions over the last five years. Migration inflow does not offset natural population decline, which results in the Region’s continuous fall in population.

Key assumptions

  • Maintaining a substantial share of manufacturing enterprises in GRP structure;
  • Maintaining mandatory budget expenses below 83%;
  • Maintaining a debt policy aimed at not overburdening the debt load.

Potential outlook or rating change factors

The Positive outlook assumes that the credit rating will most likely change within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Lower debt to operating balance ratio;
  • Refinancing of a significant portion of the commercial debt to maintain the repayment period above 2 years;
  • Increase in the relative amount of the development budget;
  • Economic growth outpacing the national average.

A negative rating action may be prompted by:

  • Significant shortening of the weighted average debt repayment period, in particular  maintaining the current bank loan repayment schedule until the beginning 2020;
  • Increase in debt load (debt to operating balance ratio) above 2.6x;
  • Substantial increase in mandatory budget expenses without corresponding growth in TNTR.

Issue ratings

No outstanding issues have been rated.

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.

The credit rating of the Ryazan Region was published by ACRA for the first time on October 16, 2017. The credit rating of the Ryazan Region and its outlook are expected to be revised within 182 days after the publication date of this press release as per the Calendar of planned sovereign credit rating revisions and publications.

The credit rating was assigned based on data provided by the Ryazan 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 rating is solicited, and the Ryazan Region Government participated in its assignment.

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

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

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