The credit rating assigned to the Volgograd Region (hereinafter, the Region) is due to the Region’s substantial debt load, low flexibility in budget expenses, low level of liquidity, and indicators of economic development (per capita) that are substantially lower than the Russian average. The rating is supported by the high level of the regional budget’s self-sufficiency and the sufficient level of economic diversification.
The Volgograd Region is part of the Southern Federal District and borders Kazakhstan. 2.5 million people live in the region and in 2017, the Region’s GRP amounted to RUB 820 bln.
Key rating assessment factors
High debt load with no short-term risk of budgetary debt refinancing. According to ACRA’s forecast, the Region’s debt to operating balance ratio at the end of 2018 could amount to 2.5 (increased risk level). As of October 1, 2018, the Region’s debt consisted of bonds (28%), bank and budget loans (25% and 45% respectively), and guarantees (2%). Due to this debt structure, interest expenses are not currently burdensome. The larger part of the Region’s debt (85%) is subject to repayment starting in 2020. Peak payments (29% of the debt) will come in 2020 when the Volgograd Region refinances practically all of its bank debt. Currently, its refinancing risk is low. In ACRA’s opinion, at the end of 2018, the Region will lower its debt to income ratio at least to the level established by additional agreements on restructuring budget loans with the Ministry of Finance of Russia.
Low budget flexibility. The budget share of tax and non-tax revenues confirms that the budget's self-sufficiency is high. At the same time, a significant share of the mandatory (according to ACRA’s methodology) expenditures indicated the budget's low flexibility. The average share of the Region’s capital expenditures is assessed by ACRA at 11%. The current version of the budget law for 2018 assumes that the Region’s budget will be executed without a deficit. ACRA expects that at the end of the year, income tax revenues will have grown by 8%, personal income tax revenues by 12%, and overall proprietary income by 11%. ACRA also notes a steady decline in the volume of overdue accounts payable over the course of 2018.
Diversified economy with per capita income below the national average. The Region's economy is based on manufacturing industries (petroleum products, finished metal products, food industry), trade (wholesale and retail), and the agricultural industry. The average per capita income and GRP per capita are 69% and 73% respectively of the corresponding national averages according to data from 2017. According to ILO methodology, the unemployment rate is dropping (from 7.2% in 2015 to 6.0% in 2017).
Key assumptions
- Fulfillment of the 2018 budget with a deficit no larger than 1% of tax and non-tax revenues;
- Compliance in 2018-2019 with the loan restructuring rules of 2017.
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:
- Reduction in the budget’s share of mandatory expenditures;
- Substantial reduction in the level of debt load.
A negative rating action may be prompted by:
- Nonfulfillment of the budget’s proprietary income if it is impossible to reduce mandatory expenses at the end of 2018;
- Substantial reduction in operating balance;
- Increase in the regional budget’s loan debt.
Issue ratings
Volgograd Region Government Bond, 2014, 35005 (ISIN RU000A0JUP89)
Maturity date – July 13, 2019, issue volume – RUB 5 bln, BBB(RU);
Volgograd Region Government Bond, 2015, 35006 (ISIN RU000A0JVU65)
Maturity date – October 30, 2020, issue volume – RUB 5 bln, BBB(RU);
Volgograd Region Government Bond, 2017, 35007 (ISIN RU000A0JXSD3)
Maturity date – June 2, 2024, issue volume – RUB 10 bln, BBB(RU).
Rationale. In ACRA’s opinion, the above bonds issued by the Volgograd Region are senior unsecured instruments, and their credit rating is equal to the rating assigned to the Volgograd Region.
Regulatory disclosure
The credit ratings of the Volgograd Region and the bonds (ISIN RU000A0JUP89, RU000A0JVU65, RU000A0JXSD3) issued by the Volgograd Region were 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. In the course of the credit rating process relating to the above bond issues, 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 assigned to the Volgograd Region was published by ACRA for the first time on June 26, 2017. The credit ratings assigned to the sovereign bonds issued by the Volgograd Region (ISIN RU000A0JUP89, RU000A0JVU65, RU000A0JXSD3) were published by ACRA for the first time on June 27, 2017.
The credit rating of the Volgograd Region and its outlook and the credit ratings assigned to the sovereign bonds (ISIN RU000A0JUP89, RU000A0JVU65, RU000A0JXSD3) issued by the Volgograd Region are expected to be revised within 182 days following the rating action date (December 10, 2018) as per the 2018 Calendar of planned sovereign credit rating revisions and publications.
The credit ratings were assigned and confirmed based on the data provided by the Administration of the Volgograd Region, information from publicly available sources (the RF 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 Administration of the Volgograd Region participated in the rating process.
No material discrepancies between the provided data and the data officially disclosed by the Volgograd Region in its financial report have been discovered.
ACRA provided no additional services to the Administration of the Volgograd Region. No conflicts of interest were discovered in the course of the credit rating process.
