For the first time in five years, budget loans refinance debt instead of bridging deficit. At end 2016, the regions saw their debt to banks underperform their payables to budgets by RUB 157 bln, marking the first such instance since 2011. That said, not all of the regions have substituted their market debt with the budget one, particularly those with an unstable financial standing.
In 2017, repayment of budget loans is to exceed their issuance. This year, the scheduled budget loan repayment stands RUB 20–30 bln above the amount of new loans to be given out by the Federal Budget. However, reverse refinancing and the need to bridge deficits will once again change the structure of regions’ liabilities, and by end 2019, the share of market debt in their debt structure may run into 80%.
Short-term Federal Treasury loans have not abated regions’ need for bank loans. In 2014–2016, annual debt repayment and raising stood at around RUB 1 trillion, with spending seasonality and unavailability of Treasury loans each December creating an increased year-end demand for bank credit resources.
Regional bond placements may double in 2017–2019. The potential volume of regional bond issuance aimed at refinancing bank debt and budget loans may amount to RUB 250–300 bln a year in 2017–2019. Bonds look more attractive than bank loans, being cheaper at the longer end even for the most leveraged regions. Offering bonds instead of taking out loans may save borrowers 2–3% in annual debt servicing costs within this period.
Budget loans helped refinance debt to banks in 2016
The Federal Budget provides loans to regions under an interest rate of 0.1% per annum for up to five years. At end 2016, the Russian regions ran RUB 2 bln of budget deficit.
The amount of budget loans was relentlessly striving upwards in 2014–2016. Coupled with low deficit run by non-consolidated regional budgets last year, this allowed regions to change their debt structure. At end 2016, regions’ payables to the Federal Budget exceeded those to banks for the first time since 2011. In 2016, the former expanded again almost by a quarter, while the latter shrank 16%. In other words, the year 2016 saw the entire budgetary system financing its deficit by budget loans, while those taken out of banks were being partially repaid.
Figure 1. Budget loans started to be used for market debt refinancing
Be as it may, but the regional debt structure will face a reverse change (i.e. the share of market borrowings will increase), if the previously issued budget loans are not restructured (prolonged, provide the relevant additional agreements are signed). At the same time, the draft law on the Federal Budget submitted to the State Duma apparently contained no provisions allowing for such prolongation.
In 2013–2016, the Federal Budget envisaged giving out tree-year loans. Comparing volumes and tenors of budget loans issued in 2013–2016 with those of budget loans to be disbursed in 2017–2019 may help gauging the substitution effect of market loans over budget ones in an environment of moderately growing budget deficit (see Figure 2).
Although the current edit of the 2017–2019 Federal Budget law says nothing about the amount of budget loans maturing during this period, the balance of such loans issued and repaid (the amount repaid net of the amount issued) will be positive this year, by ACRA’s estimates. This assumption is supported by the results of the draft law’s first reading in the State Duma. So, in 2017, the regions will repay more budget loans than they will get, which is quite logical considering the fact that the current year is slated to see some RUB 200 bln of new budget loans given out, while around RUB 230–240 bln is expected to be repaid (the loans issued three years ago, i.e. in 2014). The balance is expected reach some RUB 130 bln by 2018 and further RUB 150 bln in 2019.
Budget loan restructuring is neither banned, nor restricted in terms of repayment schedule by the Budget Code. For example, a RUB 50 bln worth of budget loans issued in 2011 for road construction and maintenance was prolonged till 2025–2034 in 2015.
Figure 2. Regions to refinance budget debt*
FTD stands for Federal Treasury Department.
FTD loan: One of covenants is absence of deposits. Size does not exceed the 1/12 of regional budget’s revenues net of targeted transfers. Term – 50 days.
Starting 2014, the Russian regions have been eligible for FTD loans to replenish their short-term liquidity balances. Previously, to bridge cash gaps they took put short-term loans from banks.
Being practically gratis, FTD loans have a number of limitations. For instance, they have to be repaid not later than November 25 of the current year. But the year-end traditionally accounts for a significant share of regional budget expenditures. So in December, regions most proactively borrow from banks: in 2012–2016, they used to take out bank loans averaging RUB 54 bln in January–November, but as much as RUB 247 bln in December. In 2015–2016, when the FTD tool became most popular, the situation hardly changed much, with December seeing RUB 200 bln taken out of banks in 2015 and Rub 259 bln in 2016.
Figure 3. Regions borrow from banks mostly in December
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