The credit rating of the Penza Region (hereinafter, the Region) is based on moderate economic development indicators and a stable budget profile. The rating is limited by debt refinancing risks combined and limited sources of liquidity.
The Region is located in the Volga Federal District and its gross regional product (GRP) is close to 0.5% of the aggregate GRP of all Russian regions. The Region is home to nearly 0.9% of the Russian population.
Key rating assessment factors
Stable budget profile indicators. The Region executed its 2019 budget with a small deficit — 2% of tax and non-tax revenues (TNTR): expenses increased by 6% while income grew by only 4%. TNTR increased by 1% while profit tax declined by 6%. Transfers, which increased by 9% (RUB 1.9 bln) compared to 2018, contributed the most to the growth of budget income. Income tax revenues, the largest component of the Region’s tax revenues, grew by 5% in 2019.
The budget’s operational efficiency was 10% last year. ACRA predicts that the Region will maintain this moderate level of operational efficiency in 2020. The flexibility of budget expenses is moderately high and should average1 15% for 2016–2020.
1 Hereinafter, averages are calculated according to the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation.
In 2016–2020, the average share of TNTR in income (excluding subventions) is expected to be 65%. In 2020, the ratio of the modified budget deficit to current income should continue to be at a minimum positive level, which means the Region will not need to resort to debt financing if the current budget parameters are maintained. The Region has forecast a budget deficit of around 2% of TNTR for 2020, which it will finance primarily using sources that are not related to debt financing.
The debt repayment schedule is a source of refinancing risks. At the start of 2020, the Region’s debt totaled RUB 20.1 bln and consisted of commercial and budget loans (55% and 45%, respectively). Guarantees provided by the Region account for less than 1% of its debt portfolio. The peak of repayments (RUB 7.5 bln or 38% of total borrowings) is scheduled for 2021, and are mostly bank loans. Given the Region’s history of holding low account balances and taking into budget parameters that do not envisage a surplus this year, ACRA expects the Region to take measures to refinance its debt (in 2020 only 4% of total debt needs to be repaid).
The Region’s debt to current income ratio was 38% as of the end of 2019. In 2020 and 2021, ACRA expects this indicator to be 37% and 35%, respectively (in absolute terms this corresponds to debts of RUB 20.3 bln and RUB 19.4 bln). The Region’s interest expenses are not a burden on the budget, with the average level of interest expenses in 2016–2020 at around 2% of aggregate budget expenses (excluding subventions).
In 2019, the ratio of debt to internal revenues was 58%, which is in line with the Region’s obligations for refinancing budget loans. The Region has to cut its debt load to 55% in 2020 as per the parameters set out by its budget law. ACRA believes that if tax revenues fall short of the targets set by the regional budget this may lead to a violation of obligations to the Ministry of Finance of Russia.
Budget liquidity is limited due to insignificant account balances. The liquidity assessment is based on low balances in Federal Treasury accounts combined with an insignificant volume of undrawn credit lines with a drawing period of more than a year. End-of-month account balances for the past 18 months have averaged 13% of the Region’s total monthly budget expenses. The Region has signed a budget loan agreement with the Federal Treasury Department.
Moderate economic development indicators and a diversified tax revenue structure. Wholesale and retail trade is the key sector in terms of tax revenues (eight of the ten largest regional enterprises by revenue operated in this sector in 2018). Despite this, tax revenues are not heavily concentrated in this sector. ACRA’s calculations show that in 2016–2019, it generated around 13% of the Region’s tax revenues. In 2019, 8.8% of tax revenues came from the transportation and storage sector, 5.7% were from agriculture, and production of foodstuffs, beverages and tobacco accounted for 4.9%. The Region’s per capita GRP in 2014–2017 averaged 54–55% of the national average. The average monthly wage to subsistence wage ratio in the Region exceeded 280% in 2015–2018.
Key assumptions
- Executing the 2020 budget with a deficit of no more than 2% of TNTR while maintaining current budget income parameters;
- Fulfilling obligations to the Ministry of Finance of Russia to cut debt load established by budget loan restructuring rules.
Potential outlook or rating change factors
The Stable outlook assumes that the credit rating will most likely remain unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- Sustainable growth of budget liquidity;
- Extension of debt maturities and reduction of debt load;
- Growth of economic development indicators.
A negative rating action may be prompted by:
- Higher debt load without an extension of debt maturities;
- Lower internal revenues;
- Reduction of the modified budget deficit to negative values.
Regulatory disclosure
The credit rating has been assigned to the Penza Region 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.
The credit rating of the Penza Region was first published by ACRA on September 20, 2018. The credit rating 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 data provided by the Penza 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 Penza Region participated in its assignment.
No material discrepancies between the provided data and data officially disclosed by the Penza Region in its financial reports have been discovered.
ACRA provided no additional services to the Government of the Penza Region. No conflicts of interest were discovered in the course of credit rating assignment.
