The credit rating of the Tambov Region (hereinafter, the Region) is based on limited flexibility in budget expenses, low liquidity, and the Region’s countercyclical economy. The rating is limited by regional economic development indicators, which lag behind the national averages.
The Tambov Region is located in the Central Federal District and is home to slightly less than 1% of Russia’s population. The Region accounts for about 0.5% of the country’s total gross regional product (GRP). Based on the Region’s data, its GRP amounted to approximately RUB 351.4 bln in 2019, with agribusiness (agriculture and food production) generating one third of the Region’s GRP.
Key rating assessment factors
Despite dependence on federal transfers, the predominance of personal income tax mitigates the impact of the pandemic. The Region’s budget largely depends on federal transfers. The averaged1 share of tax and non-tax revenues (TNTR) in total revenues (excluding subventions) for 2017−2021 should be 54.1%. Personal income tax dominates the structure of the Region’s tax revenues, averaging 37.6% for 2016−2019, with corporate income tax averaging 23.2%.
1 Hereinafter, averages are calculated according to the Methodology for Assigning Credit Ratings to Regional and Municipal Authorities of the Russian Federation.
For 9M 2020, personal income tax revenues increased by 7.9% compared to the same period last year, with transfers increasing by 37.5%. Income tax revenues also increased by 13.3% compared to the same period last year. The growth was largely driven by revenues from the textile industry, trade, and real estate activities (probably due to a new enterprise in the Region).
Revenue from taxes on goods and services remained almost unchanged, increasing by 0.9%. However, property tax revenues, which are significant for the Region’s budget, decreased by 14.7% as expected.
According to ACRA, TNTR may decrease by 3.2% in 2020 compared to last year, but total revenues should grow by 13.5% due to federal transfers with a 12.0% increase in total budget expenses.
The averaged share of capital expenses in total expenses for 2017−2021 should be 20.0%. On average, the Region finances more than half of its capital expenses with federal transfers allocated for agricultural and industrial development.
The averaged ratio of current account to current income for 2017−2021 should be 8.1%. The modified budget deficit indicator is extremely negative, indicating that current income is sufficient to cover current expenses and that an increase in debt is necessary to finance capital expenses.
Despite an increase in the absolute amount of debt, the debt load assessment remains unchanged due to the growth of current transfers. The Region’s debt to current revenues ratio was 46.8% as of the end of 2019. Despite the increase in the absolute amount of debt, ACRA estimates that the debt load will decrease slightly to 44.1% by the end of 2020, mainly due to an increase in current transfers.
As of October 1, 2020, the Region’s public debt amounted to RUB 18.6 bln and included government securities (43.6%), budget loans (32.8%, including a treasury loan accounting for 12.4%), and bank loans (23.6%).
As of the beginning of 2020, the largest volume of debt repayments/refinancing (26.6%) was scheduled for 2022. As of October 1, 2020, the largest volume of debt repayments/refinancing was scheduled for 2023. The Region is to repay or refinance 44.2% of its debt over the next three years.
The Region’s public debt service expenses are not burdensome on its budget (averaged interest expenses should amount to 2.8% of averaged total budget expenses, excluding subventions, for 2016–2020).
Limited budget liquidity. Throughout 2016–2020, the Region has been in need of liquidity, as its modified free cash flow has been exclusively negative (about RUB -2 bln) over this period.
The liquidity assessment is based on low account balances with some undrawn bank credit lines with a drawing period of more than a year. As of October 1, 2020, the Region’s budget accounts amounted to 45.4% of average monthly expenses for 9M 2020. The Region has signed an agreement with the Federal Treasury to receive a short-term budget loan.
The dominance of the agro-industrial complex, a non-cyclical industry, results in low regional economic development. Agriculture accounts for 22−25% of the GRP structure annually. Together with the food industry, agriculture can form up to a third of the Region’s GRP. This industry is not high-margin, but it is not cyclical.
Despite the agricultural and industrial specifics of the Region, tax revenues are diversified. In 2019, the maximum contribution to budget revenues, according to ACRA, was made by the public sector, accounting for 22.6%. Manufacturing accounted for 19.6%, while agriculture, forestry, and hunting and fishing accounted for 11.1%. In total, the agro-industrial complex, according to ACRA, accounted for no more than 17.3% in 2019.
In 2016–2019, the ratio of averaged wages to the averaged regional living wage was 2.7, and the unemployment rate was lower than the national average. The Region’s economy is characterized by relatively low GRP per capita, while there is a growing lag behind the national average (66.9% in 2015, 55.9% in 2018).
Key assumptions
- Decrease in TNTR by no more than 3% in 2020 compared to 2019;
- Continued strong dependence on federal transfers for budget revenues;
- Maintaining a high share of federal transfers in capital expenses.
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:
- Increased TNTR in total revenues (excluding subventions);
- Increased budget liquidity.
A negative rating action may be prompted by:
- Decrease in federal budget transfers;
- Substantial debt load increase in 2020;
- Decrease in available liquidity.
Issue ratings
Tambov Region Government Bond, 35002 (ISIN RU000A0JWT75), maturity date: September 20, 2023, issue volume: RUB 1.6 bln — BBB+(RU).
Tambov Region Government Bond, 35003 (ISIN RU000A0JXVH8), maturity date: July 12, 2024, issue volume: RUB 3.5 bln — BBB+(RU).
Tambov Region Government Bond, 35004 (ISIN RU000A0ZYJ18), maturity date: December 5, 2025, issue volume: RUB 3.0 bln — BBB+(RU).
Rationale. In ACRA’s opinion, the bonds listed above are senior unsecured debt instruments, the credit ratings of which correspond to the credit rating of the Tambov Region.
Regulatory disclosure
The credit ratings of the Tambov Region and bonds issued by the Tambov Region (RU000A0JWT75, RU000A0JXVH8, RU000A0ZYJ18) have been assigned under the national scale for the Russian Federation based on the Methodology for Assigning Credit Ratings 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 assigning credit ratings to the bond issues above, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation has also been used.
The credit ratings assigned to the Tambov Region and bonds issued by the Tambov Region (RU000A0JWT75, RU000A0JXVH8, RU000A0ZYJ18) were first published by ACRA on July 3, 2017, July 14, 2017, July 11, 2017, and December 13, 2017, respectively. The credit rating of the Tambov Region and its outlook and the credit ratings of the bonds issued by the Tambov Region (RU000A0JWT75, RU000A0JXVH8, RU000A0ZYJ18) 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 are based on the data provided by the Tambov Region, information from publicly available sources (Ministry of Finance, Federal State Statistics Service, and Federal Tax Service), as well as ACRA’s own databases. The credit ratings are solicited, and the Tambov Region Administration participated in their assignment.
No material discrepancies between the provided data and the data officially disclosed by the Tambov Region in its financial reports have been identified.
ACRA provided no additional services to the Tambov Region Administration. No conflicts of interest were identified in the course of credit rating assignment.
