The credit rating of the Krasnodar Krai (hereinafter, the Region) has been upgraded to A+(RU) due to a decrease in the Region’s debt load and a growth of temporarily free funds in the regional budget buoyed by an increase in tax revenues. The credit rating is supported by stable budget indicators and the low risk of debt refinancing in the long term. The rating is constrained by medium socioeconomic indicators.
The outlook is based on expectations that the Region will continue to take measures aimed at reducing its debt.
The Region is part of the Southern Federal District. The Region accounts for nearly 4% of Russia’s population and around 3% of the aggregate GRP of Russian regions. The Region is a consistent leader in terms of agricultural production in Russia. It is also a large health resort destination and an important transportation hub.
Key rating assessment factors
Decreasing debt load coupled with growing liquidity. The ratio of the Region’s debt to its current income will decline from 57% as of the end of 2018 to 37% as of the end of 2019. The ratio will remain below 40% as of the end of 2020, which corresponds to a moderately low level of debt load according to ACRA’s methodology. Market debt, including bonds and bank loans with a comfortable repayment schedule, will equal 41% of the Region’s total debt as of the end of 2020, according to ACRA estimates; 54% of the debt will be budget loans, most of which are due after 2023, while the remaining 5% is a guarantee issued by the Region for a public sector enterprise. ACRA assesses the likelihood of payments under the guarantee as high. The current debt repayment schedule indicates the low risk of its refinancing. Debt servicing costs are not burdensome for the regional budget (the average level1 of interest expenses in 2016–2020 will be below 2% of the total budget expenses, excluding subventions). The regional budget is characterized by a high level of liquidity. As of November 1, 2019, account balances double the monthly average expenditures in January–October 2019. In November 2019, the Region started to place temporarily free funds on bank deposits.
Self-sufficient budget with moderately high operating efficiency and growing tax revenues. In 2016–2020, the ratio of current account balance to current income will average 13%, which corresponds to moderately high operating efficiency of the Region. The share of own revenues is also moderately high (on average, 87% of the Region’s revenues over that period, excluding subventions). Capital expenditures, which average 12% of the Region’s total expenditures over that period, are financed primarily with its own funds, which makes it possible to consider them as a possible reserve for reducing expenses in case of a decrease in the Region’s budget revenues. According to the regional budget law, tax and non-tax revenues (TNTR) in 2019 will increase by 11% from a year earlier, and the budget surplus is expected at 4.5% of the total budget revenues (RUB 12.5 bln). ACRA estimates that the actual increase in TNTR may be higher than the planned level. For the ten months of 2019, TNTR rose by 18% compared to the same period last year, including an increase in personal income tax revenues by 38%. ACRA believes that this increase is due to one-time payments and expects a decline in personal income tax revenues in 2020.
Diversified economy with economic indicators close to the national average. The major share of the Region’s GRP is generated by sectors like transport and communications (large pipelines run across the Region), trade and repairs, agriculture (the Region is a leader in Russia in terms of agricultural production).
Additionally, manufacturing (including the food industry, which growth prospects are determined by agricultural processing, and oil refining) and services also contribute greatly to the Region’s GRP. Tax proceeds from the sector are uneven, which is due to the specifics of tax legislation and the presence of consolidated groups of taxpayers in the Region. The major share of tax revenues in the regional budget is generated by the wholesale and transport (including pipeline transport) sectors, which, according to ACRA estimates, account for nearly 14% and 18% of tax revenues in the regional budget in 2015–2019. The ratio of the average salary to the regional minimum subsistence level in 2015–2018 averaged 2.9х, while the unemployment rate did not exceed 6%. The GRP per capita is stably below the national average by 20%.
1 Henceforward, averaging is conducted as per an approach set by the Methodology for Credit Rating Assignment to Regional and Municipal Authorities of the Russian Federation.
- Maintaining the Region’s TNTR in 2020 at the level of 2019;
- Maintaining high budget liquidity;
- Maintaining capital expenditures no lower than 11% in the medium-term;
- Compliance with the budget loan restructuring agreements.
Potential outlook or rating change factors
The Positive outlook assumes that the credit rating will most likely change within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- The ratio of the Region’s debt to its current income below 30%;
- Stable growth of budget liquidity;
- The completion of a period during which the Region must provide the guarantee to the public sector enterprise;
- Increased flexibility of budget expenses.
A negative rating action may be prompted by:
- Decrease in the budget’s self-sufficiency;
- The ratio of the Region’s debt to its current income above 55%;
- Decline in capital expenses below 10%.
Krasnodar Krai, 35001 (ISIN RU000A0JXYS9), maturity date: August 9, 2024, issue volume: RUB 10.0 bln — А+(RU).
Krasnodar Krai, 35002 (ISIN RU000A0ZZ8X4), maturity date: June 3, 2025, issue volume: RUB 10.0 bln — А+(RU).
Krasnodar Krai, 35003 (ISIN RU000A1011B5), maturity date: November 12, 2026, issue volume: 10.0 bln — А+(RU).
Credit rating rationale. In ACRA’s opinion, the above bonds issued by the Krasnodar Krai are senior unsecured debt instruments, and their credit ratings are equal to the credit rating of the Krasnodar Krai.
The credit ratings were assigned to the Krasnodar Krai and bonds issued by the Krasnodar Krai (RU000A0JXYS9, RU000A0ZZ8X4, RU000A1011B5) 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. In the process of the credit rating assignment to the above issues, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied.
The credit rating of the Krasnodar Krai and credit rating of the government securities of the Krasnodar Krai (RU000A0JXYS9) were published by ACRA for the first time on October 18, 2017. The credit ratings of the bond issues (RU000A0ZZ8X4, RU000A1011B5) were first published by ACRA on October 17, 2018, and November 12, 2019, accordingly.
The credit rating of the Krasnodar Krai and its outlook as well as the credit ratings of the government securities issues of the Krasnodar Krai (RU000A0JXYS9, RU000A0ZZ8X4, RU000A1011B5) 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 ratings were assigned based on data provided by the Krasnodar Krai, 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 Krasnodar Krai Administration participated in their assignment.
No material discrepancies between the provided data and data officially disclosed by the Krasnodar Krai in its financial reports have been discovered.
ACRA provided no additional services to the Krasnodar Krai Administration. No conflicts of interest were discovered in the course of credit rating assignment.