ACRA affirms the Omsk Region at BBB(RU), outlook Stable, and bond issues at BBB(RU)

The credit rating assigned to the Omsk Region (hereinafter, the Region) is determined by a significant improvement in the debt repayment schedule as a result of the budget loans restructuring, a decline in the debt service costs resulting from budget liquidity management, sufficient 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 rating is affected by the debt to operating balance ratio of the Region.

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 1.96 mln people, with 60% living in the Omsk agglomeration.

Key rating assessment factors

The credit rating assigned to the Omsk Region (hereinafter, the Region) is determined by a significant improvement in the debt repayment schedule as a result of the budget loans restructuring, a decline in the debt service costs resulting from budget liquidity management, sufficient 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 rating is affected by the debt to operating balance ratio of the Region.

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 1.96 mln people, with 60% living in the Omsk agglomeration.

A diversified economy with developed petrochemical, mechanical engineering, and food industries. The manufacturing industry accounts for around 36% of the GRP, with approximately 63% of the total shipped products manufactured by the petrochemical industry. The oil-refining industry upgrade program and implementation of large-scale investment projects in the agribusiness industry are expected to boost the manufacturing potential of the Region by 2020. According to ACRA estimates, the GRP per capita and the per capita income on average equaled 69% and 82% of the national averages in 2014-2018.

Low flexibility of budget expenditures. In 2017, the budget deficit has dropped to 1.3% of tax and non-tax revenues, while in 2014–2016, it exceeded 9%. In the period from 2015 to 2017, the tax and non-tax revenues profile was dominated by personal income tax, profit tax, and excise duties on alcoholic beverages (including beer): on average, they accounted for 30.4%, 23.6%, and 17.8% of tax and non-tax revenues respectively. In 2018, social spending (education, healthcare and social policy) will be about 65% of the Region’s budget spending. The pressure of social spending on the Region's budget will be compensated partially by a federal budget dotation intended to increase salaries in budgetary organizations and other purposes. The dotation will amount to RUB 8.856 bln (15.5% of the approved social spending).

Improved debt repayment schedule and reduced debt service costs. In 2017, the Region's debt increased by mere 1.48% (to RUB 44.98 billion), while the share of commercial debt (government bonds and bank loans) decreased from 62.9% to 61.7%. In 2017, the debt servicing cost decreased by almost 22.7% compared to the level of 2016. As of January 1, 2018, about 4.7% of the regional budget's debt was due in 2018 and 49.2% in 2019. In 1Q2018, the Region has managed to reduce almost twice (from RUB 20.77 billion to RUB 10.33 billion) the amount of debt on bank loans, including through the use of a loan from the Office of the Federal Treasury. This allowed the Region to reduce the volume of commercial debt, which is to be repaid in 2019 (down to 24.8% of the total debt as of April 01, 2018), as well as to reduce the debt servicing costs.

Key assumptions

  • In 2018, the Region's budget deficit will not exceed 3% of tax and non-tax revenues;
  • Budget loan restructuring rules approved in 2017 will be complied with in 2018–2019;
  • By end-2018, the Federal Treasury loans will be replaced with the commercial debt under the interest rates that will not cause a substantial growth in the debt service costs.

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:

  • Lower GRP growth rate, caused by the negative effects of market conditions on the key industries of the regional economy;
  • Budget deficit exceeding 5%;
  • A breach of budget loan restructuring rules.

Issue ratings

Omsk Region Government Bond, 2015 (RU34002OMS0, ISIN RU000A0JUX89), maturity date: October 15, 2019, issue volume: RUB 5 bln, — BBB(RU);

Omsk Region Government Bond, 2016 (RU35003OMS0, ISIN RU000A0JWX87), maturity date: November 01, 2021, issue volume: RUB 5 bln, — BBB(RU).

Credit rating rationale. In ACRA’s opinion, the below bonds issued by the Omsk Region are senior unsecured instruments, and their credit rating is equal to the rating assigned to the Omsk Region.

Regulatory disclosure

The credit ratings of the Omsk Region and bonds issued by the Omsk Region under the national scale for the Russian Federation were assigned and affirmed based on the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation, and the Key Concepts Used by Analytical Credit Rating Agency within the Scope of Its Rating Activities. In the course of assigning a credit rating to the bond issues above, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also used.

The credit rating of the Omsk Region and the credit ratings of the government bonds (ISIN RU000A0JUX89, ISIN RU000A0JWX87) issued by the Omsk Region were first published by ACRA on October 31, 2017, November 09, 2017 and November 09, 2017, respectively.

The credit rating of the Omsk Region and its outlook, as well as the credit ratings of the government bonds (ISIN RU000A0JUX89, ISIN RU000A0JWX87) issued by the Omsk Region are expected to be revised within 182 days following the rating action date (April 26, 2018) as per the 2018 Calendar of planned sovereign credit rating revisions and publications.

The credit ratings were assigned and affirmed 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 ratings are solicited, and the Government of the Omsk Region participated in the rating process.

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

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

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