Training on Forecasting, April 7–8

ACRA assigns BBB+(RU) to the Tambov Region, outlook Stable

The credit rating of the Tambov Region (hereinafter – the Region) is determined by the stable indicators of budget discipline, sufficient budget liquidity, agricultural specifics of the regional economy, the need of refinancing a significant amount of short-term debt, and a potential increase in debt load.

The Tambov Region is located in the Central Federal District, and borders five regions. A little less than 1% of the RF population live in the Region. In 2015, the Region’s GRP amounted to RUB 345 bln (0.5% of the aggregate national GRP). The regional economy is focused on the agricultural sector: up to a third of the Region’s GRP is formed by income generated by this sector (specifically pertaining to agriculture and food processing).

Key rating assessment factors

Relatively weak development of the regional economy is determined by its agricultural orientation. Agriculture (mainly crop production) accounts for up to a quarter of the regional GRP (the Region ranks 4th in the Central Federal District by produced agricultural products in monetary terms), while food processing lays the basis for industrial production (up to half of its volume). The Region’s development is constrained by the capacity of enterprises to process agricultural products produced on its territory, which, however, will gradually be offset by the increase of processing capacities and deepening of raw materials processing.

Stable budget discipline indicators with large share of capital expenditures. While the regional budget is marked by a medium self-sufficiency level, the budget discipline indicators show persistently high capital expenditures (23-31% in 2014-2016) and moderate level of mandatory budget expenditures (58-63% in 2014-2016), which, however, does not adversely affect the Region’s operating balance.  Tax proceeds to the Region’s budget are deemed to be well diversified in terms of specific taxpayers – the share of 10 largest taxpayers within total tax proceeds does not exceed 17%. However, ACRA highlights budget risks associated with tax base concentration on allied industries, i.e. agriculture, and processing of agricultural products. The aggregate share of these industries within the Region’s GRP is roughly 30%, in tax proceeds – 15%. Further growth in proceeds will correlate with wage dynamics, and deepening of agricultural products processing.

Unbalanced debt structure in terms of maturity and risk of debt load increase. Almost half of the Region's debt is subject to refinancing in 2017 (bank and budget loans), which adversely affects debt load ratios. In addition, ACRA believes that the Region will be forced to increase the amount of debt compared to the figures planned for 2018-2019 (mainly owing to market borrowings). Nevertheless, the Region's debt to operating balance ratio will remain safe in the forecast period (not higher than 2.09 as of end-2019), while debt servicing costs will not exceed 20% of the operating balance.

Sufficient budget liquidity. The Region has sufficient liquidity for timely fulfillment of its expenditure obligations, including interest payments. However, the budget account balances at the beginning of a month are mostly lower than expenditures for the current month, so the Region is regularly in need of financing expected cash gaps; hence, in order to replenish account balances and bank credit lines short-terms loans provided by the Federal Treasury Department are used. 

Key assumptions

  • Using short-term loans provided by the Federal Treasury Department for financing cash gaps;
  • Financing of Region’s budget deficit through market debt instruments;
  • Improvement of regional debt structure in terms of maturity;
  • Retaining the share of mandatory expenditures at the level within 65% of budget expenditures;
  • Receiving the amount of transfers in 2017 not lower than in 2016;
  • High regional GRP growth rate.

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:

  • Positive economic and tax effect on the back of growing output of high value-added products;
  • Household income growth ahead of the national average growth rate;
  • Decreasing budget dependence on external liquidity sources.

A negative rating action may be prompted by:

  • Increasing mandatory expenditures of the Region’s budget;
  • Material decline in capital expenditures of the budget;
  • Growing unemployment in the Region.

Issue ratings

None.

Rating history

None.

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.

A credit rating has been assigned to the Tambov Region for the first time. The credit rating and its outlook are expected to be revised within 182 days following the rating action date (June 30, 2017).

The assigned credit rating is based on the data provided by the Tambov 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 Tambov Region participated in its assignment.

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

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

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