The credit rating of the Tambov Region (hereinafter, the Region) reflects limited flexibility of budget expenses, limited liquidity, and regional economic development indicators that lag behind the national averages. The rating is supported by the Region’s countercyclical economy and smooth debt repayment schedule, which is largely the result of commercial debt restructuring.
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). The Region estimates that its GRP may amount to RUB 409 bln in 2021, with agroindustry (including agribusiness and food production) generating around one-third of this amount.
KEY ASSESSMENT FACTORS
Relatively stable tax base and significant dependence on federal transfers. In 2021, the Region's budget was executed with a surplus exceeding 13% of tax and non-tax revenues (TNTR). Revenues have grown by 11%, including TNTR (+23%). There was an increase in all types of tax revenues: corporate income tax revenues grew by 41% (while they did not decrease in 2020, when anti-pandemic restrictions were the most stringent), personal income tax revenues grew by 10%, revenues from taxes on goods and services — by 18%, those from taxes on gross income — by 47%, property tax revenues — by 9%. Transfers increased slightly (by 1%). Budget expenditures increased insignificantly and amounted to 3%.
The increase in corporate income tax revenues was mainly driven by revenues from wholesale trade, financial services, sugar production, computer manufacture, transportation and storage services, and, to a lesser extent, some other industries.
The Region's budget law provides for a 4% decrease in TNTR this year against 2021. A significant decrease in transfers is expected as well. Expenditures will be comparable with those in the previous year. The budget is planned to be deficit-free.
Budget execution metrics are likely to differ from those planned. However, due to the structure of the Region's economy featuring a high share of agroindustry, the negative impact of some factors may turn out to be unnoticeable.
Personal income tax dominates the structure of the Region’s tax revenues, averaging 35% for 2017−2021; this share is expected to equal 34% in 2022. Corporate income tax generates about a quarter of tax revenues, property taxes generate 15% or more. The structure of tax revenues is stable since the share of volatile sectors in the regional economy is low and the share of non-volatile types of taxes in the structure of tax revenues is high. At the same time, the high share of agroindustry in the Region’s economy means that the budget is dependent on weather and climate factors.
The Region's budget largely depends on federal transfers. The averaged share of TNTR in the total budget revenues of the Region (excluding subventions) for the period from 2018 to 2022 is expected at 54%. The averaged ratio of current account balance to current revenues for 2018–2022 is expected at about 8%.
The ratio of the averaged modified budget deficit to current revenues is just below zero and equalled -0.4% in the period under review. Coupled with the positive ratio of current account balance to current revenues, this indicates that current revenues are sufficient to cover current expenditures, and that, to finance its capital expenditures, the Region needs to raise funds or spend accumulated reserves. The averaged share of capital expenditures in total expenditures for 2018–2022 will be 17%. Federal budget transfers that the Region allocates to support agroindustry and other segments cover more than a half of its capital expenditures.
The debt repayment schedule became smooth after the commercial debt was restructured. In August 2021, the Region received a RUB 8.4 bln budget loan to substitute its commercial borrowings. These funds were used to substitute commercial loans, provide a budget loan to the city of Tambov, and substitute the part of bonds that were amortized.
As of January 1, 2022, one third of the Region’s debt included bonds and two thirds included budget loans. By March 1, 2022, this proportion had not changed.
In 2021, the debt decreased slightly (by 2%), and the ratio of debt to current revenues decreased from 38% to 33%, mainly due to growing revenues. At the end of this year, this ratio is expected to reach 40%.
After the debt was restructured, the Region will have to repay no more than 12.5% of its debt annually over the next three years (2022–2024).
The Region’s public debt service expenditures are not burdensome for its budget (averaged interest expenditures will amount to 3% of averaged total budget expenditures, excluding subventions, for 2018–2022).
Limited budget liquidity. Over the past 12 months, the Region’s account balances have been significant. They included a budget loan, which was used to refinance the Region's bonds, although in some months, account balances exceeded monthly average expenditures in 2021. In addition, liquidity has grown, probably due to a one-time surge in corporate income tax payments. Consequently, the liquidity assessment is based on historic low account balances and a certain volume of undrawn bank credit lines that can be used for more than a year.
The Region uses funds of autonomous and state-owned institutions and a loan from the Federal Treasury Department (FTD) to manage its liquidity. However, in 2021 and so far in 2022 the Region has not raised any funds from the FTD.
Moderate regional economic development indicators result from the dominance of non-cyclical agroindustry. The share of agroindustry has long been higher than a quarter of the GRP, and it reached 32% in 2020. Regional agroindustry and food industry jointly form up to a third of the Region’s GRP, and this share was clearly higher in 2020. Although agroindustry is not highly marginal, it is not cyclical regardless the susceptibility to climatic risks.
Other notable industries are wholesale and retail trade and repair, manufacturing, public sector enterprises, real estate services, transportation and storage services, and construction industry.
Despite the Region's agro-industrial specifics, tax revenues are diversified. The largest share is made up of revenues from public sector enterprises and manufacturing industry: slightly above 20% each; the manufacturing industry is quite diversified (the maximum share of total tax revenues falls on the food industry: 8% in 2021), other industries are less than 5% each.
In 2018–20211, the ratio of averaged wage to averaged regional subsistence minimum reached 2.95, and the unemployment rate was lower than the national average. The Region’s economy is characterized by relatively low GRP per capita, while the lag behind the national average that grew in 2016–2019, declined in 2020: the ratio of averaged regional GRP per capita to averaged national GRP per capita amounted to 57%.
1 Data for 2021 is preliminary.
KEY ASSUMPTIONS
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Continued strong dependence on federal transfers for budget revenues;
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Maintaining a high share of federal transfers in capital expenses.
POTENTIAL OUTLOOK OR RATING CHANGE FACTORS
The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Sustainable growth of budget liquidity;
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Increased share of TNTR in total revenues (excluding subventions);
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Higher current account balance due to growth of budget revenues.
A negative rating action may be prompted by:
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Growth of current expenses that is not accompanied by higher current revenues;
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Substantial increase in debt load (to above 55% of current revenues).
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 Tambov Region's 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 the bonds issued by the Tambov Region (ISIN RU000A0JWT75, RU000A0JXVH8, RU000A0ZYJ18) have been assigned under the national scale for the Russian Federation based on the Methodology for Assigning Credit Ratings to Regions and Municipal Entities of the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments on the National Scale for the Russian Federation was also applied to assign credit ratings to the above issues.
The credit ratings of the Tambov Region and bonds issued by the Tambov Region (ISIN RU000A0JWT75, RU000A0JXVH8, RU000A0ZYJ18) were published by ACRA for the first time 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 (ISIN RU000A0JWT75, RU000A0JXVH8, RU000A0ZYJ18) are expected to be revised within 182 days following the publication date of this press release as per the Calendar of sovereign credit rating revisions and publications.
The credit ratings are based on data provided by the Tambov Region, information from publicly available sources (the Ministry of Finance, the Federal State Statistics Service, and the Federal Tax Service), and ACRA’s own databases. The credit ratings are solicited, and the Administration of the Tambov Region participated in their assignment.
In assigning the credit ratings, ACRA used only information, the quality and reliability of which was, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to the Administration of the Tambov Region. No conflicts of interest were identified in the course of credit rating assignment.
