The Negative outlook for the credit rating of the Kaluga Region (hereinafter, the Region) is based on the expectation that the trend toward a decline in the Region’s per capita gross regional product (GRP) relative to the national average will continue this year.
The Region’s credit rating reflects its moderately low debt load with insignificant refinancing risks, a moderately high share of capital expenditures in total expenditures (excluding subventions), and the budget’s significant need to use additional financing. The rating is constrained by the decreasing operational efficiency of the budget and an expected decline in the volume of available liquidity by the end of this year on the back of a projected budget deficit.
The Kaluga Region is part of the Central Federal District. The Region is home to 1.0 mln people (about 0.7% of the Russian population). The Region’s GRP was RUB 664 bln in 2021 (or 0.5% of the total GRP of all Russian regions). According to the Region’s estimates, GRP amounted to RUB 669 bln in 2022.
KEY ASSESSMENT FACTORS
Declining operational efficiency of the budget and a significant need for additional funding. The Region’s ratio of current account balance to current revenues averaged1 for 2020–2024 will amount to around 1%. However, the current account balance is expected to be below zero in 2023–2024 (-1% and 5% of current revenues, respectively) due to the expected budget deficit during that period. Declining operational efficiency indicates a need to use additional sources of financing to cover current expenditures.
The share of capital expenditures in total expenditures averaged over 2020–2024 will be 17%. On average, around half of capital expenditures is covered by the Region’s budget. The share of tax and non-tax revenues (TNTR) in the Region’s revenues (excluding subventions) averaged over the above period will be 79%.
ACRA forecasts the ratio of modified budget deficit to current revenues averaged over 2020–2024 at -11%. The negative modified budget deficit indicates a significant need to use account balances, along with debt financing, to partially cover budget expenditures. According to ACRA’s calculations, the modified budget deficit will remain negative in 2024.
The 2022 budget deficit amounted to 7% of TNTR and was financed using accumulated liquidity and federal budget loans.
According to the current version of the Regional budget law for 2023–2025, revenues will decrease by 3% this year compared to 2022. TNTR will increase by 4%, including corporate income tax revenues growing by 12% and personal income tax revenues growing by 6%. The volume of transfers is planned to be 24% lower than last year. Budget expenditures are expected to decrease by 1% year-on-year, mainly due to capital expenditures falling by 8%. The 2023 budget deficit may amount to 10% of TNTR, and it will mainly be covered using account balances.
According to the draft version2 of the budget law for 2024–2026, next year the Region’s total revenues are expected to fall by 2% vs. 2023 amid growth in TNTR by 5% and transfers falling by 30%. Planned expenditures for 2024 are 13% lower than the indicator expected this year. The target deficit of 1% of TNTR will be covered by the Region’s available liquidity.
Over the first nine months of this year, the Region’s revenues increased by 7% compared to the same period in 2022. TNTR grew by 12% over this period, mainly due to corporate income tax revenues (largely in the Region’s manufacturing industry) increasing by 23% and personal income tax increasing by 10%. Transfers declined by 13%. The expenditure side of the budget for the aforementioned period declined by 1% and the Region recorded an intermediate budget surplus of RUB 5.2 bln.
ACRA assumes that budget expenditures will grow in 2023 relative to the actual execution of the budget in 2022 due to an increase in current expenditures on par with expected inflation. In this case, if the expected volume of revenues remains unchanged, the Region will end this year with a deficit of 18% of TNTR, which will be covered using accumulated funds and borrowings. The Agency believes that the Region’s current expenditures will continue to grow at near-inflation levels in 2024.
1 Hereinafter, averages are calculated according to the Methodology for Assigning Credit Ratings to Regions and Municipal Entities of the Russian Federation.
2 By resolution of the Legislative Assembly of the Kaluga Region dated November 16, 2023.
Moderately low debt load with insignificant refinancing risks. The Region’s debt increased by 10% and amounted to RUB 29.5 bln in 2022. The Region’s debt portfolio only included budget loans. At the beginning of this year, the debt repayment schedule was smooth, without any peak repayments, and the Region had to repay no more than 5% of its debt annually in the next two years.
As of November 1, 2023, the Region’s debt had increased by RUB 3.1 bln and amounted to RUB 32.7 bln. Debt grew due to the Region obtaining budget loans, out of which RUB 0.8 bln were loans for advanced financing of the Region’s expenditure obligations with repayment in 2024 through transfers from the federal budget, and the rest were budget loans for financing infrastructure projects with repayment until 2038. According to the current debt repayment schedule, in 2023–2024 the Region will repay 4% and 7% of its liabilities, respectively.
The Region’s debt-to-current revenues ratio amounted to 39% in 2022. ACRA expects this ratio to increase to 46% in 2023, which also indicates a moderately low debt load.
Interest expenses are not burdensome for the Region due to the non-commercial nature of debt: interest expenses averaged over 2020–2024 are less than 1% of total budget expenditures (excluding subventions). The Region’s debt-to-GDP ratio projected for the end of this year will be around 5%.
Liquidity will be used to cover the expected budget deficit. Since the beginning of 2023, the Region’s account balances were, on average, 1.5 times higher than the volume of monthly budget expenditures. At the same time, as of November 1, 2023, the volume of temporarily free funds was almost three times higher than the indicator as of the start of the year. According to the Agency’s forecast, the Region will apply all its available funds to finance the expected budget deficit.
The Region’s budget liquidity ratio (at the budget deficit expected by the end of 2023) will be 39%.
As of October 1, 2023, the Region had neither overdue accounts payable nor committed credit lines with a utilization period of over one year. The Region has already borrowed budget loans from the Federal Treasury Department to replenish its balance of funds this year.
The Region’s economy is growing at a slower rate than Russia’s economy. In ACRA’s opinion, the significant lag between the dynamics of Region’s GRP and the national average in 2022 will lead to the averaged ratio of the Region’s per capita GRP to the national average for 2019–2022 declining below 80%. The Agency assumes that the growth rates of the Region’s GRP in 2023 will exacerbate the trend observed this year, which means it is not a short-term phenomenon. Due to this, the averaged ratio of per capita GRP to the national average for 2020–2023 is also expected to remain below 80%.
At the same time, ACRA notes that the dynamics of seasonally adjusted monthly data for the industrial production index for the last few months points toward a growth trend for the Region’s industry. If these positive dynamics remain in place and strengthen, then they will have a favorable impact on the Region’s GRP this year.
According to the Agency’s estimates, the largest share of taxes paid by enterprises registered in the Region comes from the manufacturing sector. The share of such tax revenues averaged over 2019–2022 amounted to 44%, and it was generated by companies in the food, metal, automotive and other industries, which is an indication of a high diversification of tax revenues in the private sector of the economy. The second largest private sector that generates a significant share of tax revenues is wholesale and retail trade, whose share of tax revenues in the above period amounted to 15%. At the same time, the aggregate of public sector industries generated about 13% of tax revenues in the same period, which indicates low dependence of the Region’s economy of this sector. Over the 10 months of 2023, there were no significant changes to the diversification of tax revenues.
The Region’s economy demonstrates moderate GRP per capita (the 2018–2021 average was 82% of the national average). The ratio of wage to the regional subsistence minimum for the working-age population averaged for 2019–2022 exceeded 350%, which is positive for the Region’s economic profile. The 2019–2022 averaged unemployment rate was 4.0%. Unemployment in the Region for June to August 2023 was just over 2%.
KEY ASSUMPTIONS
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The Region’s GRP lagging behind the national average in 2022–2023;
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Execution of the expenditure side of the budget in line with the parameters determined by the current version of the budget law;
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Current expenditures growing in 2023–2024 on par with the expected inflation rate;
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The entire volume of accumulated liquidity to be used to cover the projected budget deficit;
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Borrowing to finance the projected budget deficit.
POTENTIAL OUTLOOK OR RATING CHANGE FACTORS
The Negative outlook assumes that the credit rating will highly likely be downgraded within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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A less significant change in the ratio of regional to national average GRP indicators compared to ACRA’s forecast;
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Growing share of capital expenditures in the budget;
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Significant decline in the need to use additional financing;
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Debt load sustainably below 30%;
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The volume of the Region’s account balances remaining unchanged.
A negative rating action may be prompted by:
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Ratio of the Region’s per capita GRP to average national GRP falling below 80%;
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Prolonged deterioration of socioeconomic development indicators;
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Further decline in the budget’s operational efficiency;
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Significant increase in the share of short-term debt;
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Considerable decline in available budget liquidity.
ISSUE RATINGS
There are no outstanding issues.
REGULATORY DISCLOSURE
The credit rating of the Kaluga Region has 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 credit rating of the Kaluga Region was published by ACRA for the first time on December 8, 2022. 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 sovereign credit rating revisions and publications.
The credit rating was assigned based on data provided by the Kaluga 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 rating is solicited and the Government of the Kaluga Region participated in its assignment.
In assigning the credit rating, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to the Government of the Kaluga Region. No conflicts of interest were discovered in the course of credit rating assignment.
