The credit rating assigned to the Novgorod Region (the Region) is based on the Region's comparably high debt load coupled with irregular debt repayment schedule and low flexibility of budget expenditures, as well as moderate metrics of the regional economy.
The Novgorod Region is located in the North-West Federal District and borders four other regions of the Russian Federation. 0.4% of the Russian population live in the Region; its gross regional product (GRP) is 0.4% of the total Russian GRP. The main railway and automobile highways connecting Moscow, St. Petersburg and the Baltic countries pass through the territory of the Region.
Key rating assessment factors
Irregular debt repayment schedule and comparably high debt load. As of January 01, 2019, the Region's debt included bank loans and restructured budget loans (about one third and two thirds of the debt, respectively). The debt to operating balance ratio of the Region as at year-end 2019 would equal 2.8x according to ACRA estimates, which corresponds to a high risk level. The Region has to repay its debt obligations worth RUB 460 mln (representing 3% of its total debt) in 2019 and RUB 6.1 bln in 2020 (39% of its liabilities representing the entire bank debt and a portion of budget loans). The operating balance less interest payments to debt repayment ratio will drop by year-end 2020 to less than one tenth of its 2019 value and equal 91%, which suggests a high risk of debt refinancing in 2020. The debt service cost is low, as the share of budget loans in the Region's debt structure is high. ACRA estimates that in late 2019, the ratio of debt to internal revenues of the Region would stay within the target range set by the RF Ministry of Finance for budget loan restructuring purposes. The Region's liquidity is high enough for it to timely perform its expenditure commitments including interest payments. The 16% increase in actual proceeds from tax and non-tax revenues for the five months of 2019 (YoY) and maintaining expenses at the previous year’s level enabled the Region to accumulate a record cash balance (for the analyzed period since 2015) equal to 1.5 months-worth of its expenses. ACRA believes that the increase in actual tax and non-tax revenue proceeds in the above period was driven by increased income tax proceeds from a chemical enterprise owing to its one-off non-sale income item. To cover possible cash gaps, the Region may borrow short-term loans from the Federal Treasury Office.
Budget flexibility is low, as the share of mandatory expenditures is significant.
The regional budget revenues include mainly internal revenues: the share of internal revenues (excluding subventions) in the total amount of the Region's revenues would average 77% for 2016-2019. However, that share tends to decline in 2017-2019 owing to higher non-repayable proceeds (mostly other inter-budget transfers) vs 2014-2016. Due to the high share of mandatory expenses (averaging 78% in 2016-2019), the Region's operating balance averaged 20% in the above period, while the share of capital expenditures is fairly low (11%). ACRA does not expect that the structure of the Region’s budget revenues and expenditures will change significantly in the mid-term.
Diversified economy with developed chemical industry and a growth potential in the transportation services segment. The largest local enterprise is PJSC Acron, a fertilizer manufacturer that generates about 40% of the total shipped products of the Region's manufacturing sector. The share of tax revenues coming from the local chemical industry was low and varied from 6% to 10% of the Region's total tax revenues in 2015-2018. Other major sectors of the regional economy include construction, whose share will decrease with the completion of the M11 highway project, and transport and communications, whose prospects, on the contrary, will increase after the M11 project is completed. The economic development indicators (per capita GRP, per capita income) are about 80% of the national averages. The rate of unemployment is below the national average. In the long term, the ageing and thinning local population may result in insufficient human resources and, possibly, increased social spending.
Key assumptions
- Debt policy aimed at raising short-term commercial debt;
- The operating costs will create headwinds for the operating balance in the forecast period.
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:
- An improvement in the commercial debt repayment schedule (declining refinancing risk with respect to a substantial share of the debt within one year);
- A lower relative debt load;
- A limited growth of mandatory expenditures in 2019–2020.
A negative rating action may be prompted by:
- Growing mandatory expenditures not supported by growing budget revenues.
Issue ratings
No.
Regulatory disclosure
The credit rating have been assigned to the Novgorod Region under the national scale for the Russian Federation based on the Methodology for Credit Rating 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.
For the first time, the credit rating assigned to the Novgorod Region was published by ACRA on July 27, 2018. The credit rating of the Novgorod Region and its outlook are expected to be revised within 182 days following 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 the data provided by the Novgorod 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 Government of the Novgorod Region participated in its assignment.
No material discrepancies between the data provided and the data officially disclosed by the Government of the Novgorod Region in its financial report have been discovered.
ACRA provided no additional services to the Government of the Novgorod Region. No conflicts of interest were discovered in the course of credit rating assignment.
