The credit rating of the Novgorod Region (hereinafter, the Region) is based on the Region’s moderate economic development indicators and medium debt load coupled with an irregular debt repayment schedule and average budget liquidity.
The Novgorod Region is located in the North-Western Federal District and borders four other regions of the Russian Federation. 0.4% of Russia’s population live in the Region; its gross regional product (GRP) is 0.4% of the total Russian GRP. The main railroads and highways connecting Moscow, St. Petersburg and the Baltic countries pass through the Region.
Key rating assessment factors
Medium debt load and significant refinancing risk. The Region’s debt to current income ratio has fallen from 52% at the end of 2018 to 44% at the end of 2019. This is due to increased income tax revenues and transfers from the federal budget. In absolute terms, the size of debt as of the end of 2019 should remain unchanged and amount to around RUB 15.5 bln. The debt to current income ratio should be no higher than 50% by the end of 2020 if the budget parameters set out by the 2020 budget law draft are adhered to. Should actual tax and non-tax revenues (TNTR) decrease by 10% in 2020 compared to the target values, the ratio will stand at 57%, which corresponds to a medium debt load per ACRA’s methodology. At the end of 2020, the Region’s debt will be almost equally divided between bank loans and restructured budget loans. In 2019, 3% of the Region’s debt obligations were subject to repayment/refinancing. In 2020, the Region will have to repay/refinance 39.6% of its debt. Repayment is scheduled to take place in stages, which partially mitigates the refinancing risk. Debt servicing expenses are not a burden on the regional budget due to the high share of budget loans in the Region’s debt structure (the average level1 of interest expenses in 2016–2020 will amount to less than 2% of total budget expenses excluding subventions). ACRA estimates that in 2019 the ratio of debt to internal revenues of the Region should stay within the target range set by the Russian Ministry of Finance when restructuring budget loans.
1 Hereinafter, averages are calculated according to the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation.
Average budget liquidity. The Region possesses sufficient liquidity to meet its expenditure commitments on time, including interest payments. The 19% growth of budget income for 10M 2019 (year-on-year) and 13% increase in expenses enabled the Region to accumulate record account balances (for the analyzed period since 2015) equal to 1.5 months’ worth of expenses. In ACRA’s opinion, account balances may decline considerably in December 2019 due to the Region using these funds to finance its expenses. The Region’s government may borrow a short-term loan from the Federal Treasury Department to cover possible cash gaps.
Growth of dependence on transfers from the federal budget. The average share of internal revenues (excluding subventions) for 2016–2020 in the Region’s total revenues should amount to 73%. However, this share tends to decline in 2017–2019 owing to higher transfers from the federal budget (mostly other inter-budget transfers and non-target transfers) vs 2014–2016. It is expected that federal budget subsidies to the Region will grow by 2.2 and 3.7 times in 2019 and 2020, respectively, compared to 2018. In 2016–2020, the ratio of the current account balance to current income will average 7%, while the ratio of the modified budget deficit to current income will stand at (-)2%. These indicators show that current income is sufficient to cover current expenses and that the Region needs to resort to borrowing only in order to finance capital expenses. Average capital expenses in 2016–2020 account for 13% of total budget expenses and are 30–40% financed by subsidies from the federal budget.
Diversified economy with a 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 from the chemical industry ranged from 6% to 10% of the Region’s total tax revenues in 2015–2018. In 9M 2019, the share of tax revenues from the chemical industry grew to 15% due to an increase in income tax revenues resulting from a one-time increase in their non-operating income. 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 Region’s average per capita GRP for 2014–2017 amounted to 85% of the national average. The ratio of the average wage to the regional subsistence minimum in 2015–2018 averaged 271%. 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;
- Maintaining the Region’s TNTR at the 2019 level in 2020.
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:
- Improvement in the commercial debt repayment schedule (declining refinancing risk in relation to a substantial share of debt within one year);
- Lower relative debt load;
- Stable growth of budget liquidity.
A negative rating action may be prompted by:
- Growing current expenditures not supported by growing current budget revenues.
Issue ratings
No outstanding issues have been rated.
Regulatory disclosure
The credit rating has 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.
The credit rating of the Novgorod Region was published by ACRA for the first time on July 27, 2018. The credit rating of the Novgorod Region is 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 data provided by the government of 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 provided data and data officially disclosed by the government of the Novgorod Region in its financial reports 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.
