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

The credit rating assigned to the Omsk Region (hereinafter, the Region) is determined by a significant improvement in debt repayment schedule as a result of the expected fiscal loans restructuring, adequate self-sufficiency of the revenue side and low control over the spending side of the budget. The rating is supported by a significant diversification of the Region’s economy.

The Omsk Region is located in the Siberian Federal District and borders three Russian regions and the Republic of Kazakhstan. The Region’s population is 1.97 mln people, with 60% living in the Omsk agglomeration.

Key rating assessment factors

A diversified economy with developed petrochemical, mechanical engineering, radio-electronics, and food enterprises. The manufacturing industry accounts for around 36% of the GRP, with approximately 63% of the total shipped products manufactured by the petrochemical industry. By finishing the modernization program and construction of new enterprises in the oil-refining industry, as well as implementation of large-scale investment projects in the agribusiness industry will boost the manufacturing potential of the Region. GRP per capita and per capita income on average equaled 73% and 84% of the national averages in 2014-2017.

Low flexibility of the budget’s spending side. In 2014-2016, the operating balance of the Region was on average at 10% of the regular revenues. Following 2017 results, ACRA expects the operating balance to grow by 13.5% and to remain at that level in 2018-2019. In the tax and non-tax revenues structure, personal income tax revenues prevail as well as excise duties on alcoholic beverages (including beer): on average they account for 30.3%, 23.4%, and 18.3% of tax and non-tax revenues respectively. Social spending (education, healthcare and social policy) account on average for 69% of the Region’s budget spending. The high share of social spending in the budget is stems from the need to execute the May Orders of the Russian President as to increasing wages in the public sector.

Around 42% of the Region’s debt (RUB 16.4 bln) are subject to the forthcoming restructuring of fiscal loans. The restructuring will significantly improve the debt repayment schedule: repayment of over 52% of the debt will be shifted to 2020 and beyond. Debt service expenses amount approximately to 23% of the operating budget, which corresponds to low risk. The Region uses loans from the Federal Treasury Department to reduce bank debt intra-year, which lowers debt service expenses.

The Region uses passive accounts mechanism to manage liquidity: free cash balances are used to reduce bank debt enabling additional savings on debt service expenses. If necessary, the Region uses funds available as part of revolving credit facilities as well as available balances on accounts of state-financed organizations.

Key assumptions

  • Restructuring of fiscal loans of RUB 16.4 bln;
  • Budget deficit reduction in 2018-2019 (down to 3% of tax and non-tax revenues);
  • The operating balance remains above 13% in 2017-2018; 

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:

  • Growth of tax and non-tax revenues exceeding 4.5% annually in 2018-2019;
  • Reduction of budget deficit below 1% of tax and non-tax revenues in 2018;
  • Growth (vs the national averages) of the regional economy development indicators (GRP per capita, income per capita).

A negative rating action may be prompted by:

  • An increase in debt service expenses by more than 60% (from 23% of the operating balance to 37% or more);
  • A decline of the operating balance to or below 9%;
  • A decline in GRP growth rate as a result of adverse effects of the market environment on key industries of the regional economy.

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.

The credit rating has been assigned to the Omsk Region for the first time. The credit rating and credit rating outlook are expected to be revised within 182 days following the rating action (October 27, 2017).

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

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

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

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