The credit rating of the Orenburg Region (hereinafter, the Region) has been upgraded due to an increase in the Region’s internal budget liquidity buoyed by the growth of budget revenues. The credit rating takes into account the moderate indicators of the Region’s economic development compared to the national average and dependence of economic and budget indicators on the dominant industry, as well as the Region’s highly self-sufficient budget with a significant share of mandatory expenses.
The Orenburg Region is located in the Volga Federal District at the crossroads of two continents, Europe and Asia. The Region borders five other regions in Russia, as well as Kazakhstan. 1.3% of Russia’s population lives in the Region and it accounts for 1.2% of Russia’s total GRP. The Region produces around 3% of Russia’s crude oil and gas annually.
Key rating assessment factors
High ruble prices for hydrocarbons allow the Region to accumulate its internal liquidity and reduce debt load. The 2018 budget surplus of RUB 11.7 bln was partially allocated by the Region to repay its debt, which decreased by RUB 2.6 bln through the year, and build its internal liquidity reserve. As of January 1, 2019, the amount of funds on the Region’s accounts was nearly RUB 9 bln. As of June 1, 2019, it rose to RUB 17 bln thanks to the favorable conditions in the hydrocarbon market. The Region plans to place its own funds on bank deposits, which will allow the Region to receive additional income from the placement of funds. Funds from the Federal Treasury Department have not been raised since the start of the year.
As of June 1, 2019, the Region’s debt stood at RUB 22.5 bln and was made up of bonds (43%) and budget loans (57%). The Region needs to refinance an average of 8% of its total debt annually between 2019 and 2022. The major amount of debt repayment (70% of debt) is in 2023–2034, which is why the risk of refinancing is extremely low in the mid-term. In 2019, the Region has already performed all of its bond and government guarantee obligations. The Region’s own funds cover 77% of its total debt.
The Region’s debt load indicators correspond to the minimal level of risk, according to the ACRA methodology. Based on the parameters, set in the regional budget law, the debt to operating balance ratio will be around 1x at the end of 2019, and debt service costs will amount to 7% of the operating balance. The operating balance excluding debt service costs exceeds the amount of debt repayment by more than eight times this year.
Budget execution outpaces the planned level in 2019. The Region’s 2018 budget was executed with a 16% TNTR (tax and non-tax revenues) surplus. The growth in the Region’s revenues significantly outpaced the growth in expenses (20% vs. 4%). Corporate income tax ensured the main growth in revenues (41%, or RUB 10 bln). Production of hydrocarbons and ferrous metal industry were the main drivers of TNTR growth (RUB 5 bln and RUB 2 bln respectively, which provided a 35% and 14% TNTR growth). For the five months of 2019, the growth in income tax revenues is comparable to that seen in the same period last year, i.e. 44%. For the five months of 2019, the Region received 52% (RUB 17 bln) of the planned income tax revenues. A high growth rate of income tax revenues is driven by the extractive industry (its share in TNTR was 31% in 2018). According to ACRA, the Region’s 2019 budget deficit, which is planned at RUB 5 bln (7% of TNTR), could be much less.
Budget discipline and control indicators, calculated by ACRA, are on average assessed as moderate. Although the share of the Region’s own budget revenues is quite high (83% excluding subventions) for 2016–2019, mandatory expenditures of the regional budget account for an average of 75%, which limits the flexibility of budget expenditures. The share of capital expenses in budget expenditures was 15% in the analyzed period. ACRA expects a growth in capital expenditures due to the implementation of national projects in the Region. According to the Agency’s forecast and taking into account the Region’s planned budget parameters, the operating balance to regular income ratio will decrease from 35% to 23% at the end of 2019, which slightly exceeds the 2017 level.
Key assumptions
- Execution of tax revenues in 2019-2020 at the amount not lower than the current planned level;
- Maintenance of conservative budget and debt policies;
- Maintenance of the current ruble price for hydrocarbons in the mid-term.
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:
- Lower share of mandatory expenses in the budget;
- Growth in economic development indicators (per capita).
A negative rating action may be prompted by:
- Significant increase in the Region’s current budget expenditures in case of negative changes in the metals and hydrocarbon markets;
- Use of accumulated liquidity to ensure the growth of current budget expenditures.
Issue ratings
Orenburg Region Government Bond, 35002 (ISIN RU000A0JUPE3); maturity date — June 14, 2021, issue volume — RUB 6 bln — A+(RU).
Orenburg Region Government Bond, 35003 (ISIN RU000A0JVM81); maturity date — July 3, 2025, issue volume — RUB 5 bln — A+(RU).
Orenburg Region Government Bond, 35004 (ISIN RU000A0ZYKH5); maturity date — December 2, 2027, issue volume — RUB 4 bln — A+(RU).
Credit rating rationale. In ACRA’s opinion, the bonds issued by the Orenburg Region are senior unsecured debt instruments, and their credit rating is equal to that of the Orenburg Region.
Regulatory disclosure
The credit ratings of the Orenburg Region and the bonds issued by the Orenburg Region (RU000A0JUPE3, RU000A0JVM81, RU000A0ZYKH5) were assigned 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 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 was also used.
The credit rating of the Orenburg Region and the credit ratings of the government bonds (RU000A0JUPE3, RU000A0JVM81, RU000A0ZYKH5) issued by the Orenburg Region were first published by ACRA on January 31, 2018. The credit rating of the Orenburg Region and its outlook, as well as the credit ratings of the government bonds (RU000A0JUPE3, RU000A0JVM81, RU000A0ZYKH5) issued by the Orenburg Region 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 were assigned based on the data provided by the Orenburg 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 ratings are solicited, and the Government of the Orenburg Region participated in the rating process.
No material discrepancies between the provided data and the data officially disclosed by the Orenburg Region in its financial statements have been discovered.
ACRA provided no additional services to the Government of the Orenburg Region. No conflicts of interest were discovered in the course of credit rating process.
