The credit rating of the Komi Republic (the Republic) has been upgraded in view of the growing liquidity of the republican budget and the budget execution trends that may allow the Republic to reach a balanced budget in 2019. The credit rating is supported by the high share of internal revenues and the debt structure balanced by maturities. The rating is capped by the inelastic profile of budget expenditures, unemployment rate exceeding the national average, and relatively low diversification of the local economy.
The Republic is located in the North-Western Federal District. A part of its territory belongs to the Far North area. About 0.6% of the Russian population live in the Region. In 2018, the Republic's GRP amounted to RUB 648 bln.
Key rating assessment factors
Medium debt load, well-balanced debt maturities, and increasing budget liquidity. By the end of 2019, the Republic's debt to operating balance ratio is expected not to exceed 185%, which indicates the average level of debt load. As of July 1, 2019, the debt included bonds (72.9%) and budget loans (26.8%), as well as an insignificant share (0.3%) of guarantees. The current debt repayment schedule indicates a minimum risk of debt refinancing, however, the planned gradual substitution of bonds and budget loans with bank loans may lead to a change in the debt repayment schedule in the medium term. Debt servicing costs are not burdensome for the regional budget. ACRA notes that the Republic still faces the risk that some public sector enterprises will require budget support to cover their financial indebtedness, which may affect the republican budget to some extent. As of July 1, 2019, budget account balances make up 175% of average monthly expenditures in January 1, 2018 – July 1, 2019 and cover 40% of the Republic's debt obligations. In April 2019, the Republic began to deposit temporarily surplus funds to bank accounts.
Limited flexibility of budget expenditures and high budget self-sufficiency. The republican budget self-sufficiency is assessed as high, as in 2016–2019, the internal revenues generated an average of 93% of the local revenues excluding subventions, while the share of mandatory expenditures (as defined in the ACRA's methodology) and capital expenditures were 79% / 9%, respectively, which indicates a relatively low flexibility of budget expenditures. In H1 2019, the volume of income tax revenues increased by almost 1.5 times y-o-y, which resulted in a half-year budget surplus of RUB 5.4 bln or 13.7% of tax and non-tax revenues. At the same time, the republican budget expenditures have also grown but to a lesser extent (by 11.5%). In 2019, the Region’s budget may be executed with a surplus of about RUB 1 bln due to seasonality of budget expenditures. ACRA expects that, in case of a slowdown in the income tax revenue growth, the budget will become deficit-ridden, and to cover the deficit, the Republic will have to spend the funds held on the accounts.
Budget volatility is caused by the dependence on the largest taxpayers operating in the extractive sector. The economic indicators of the Republic are diametrically opposite. On the one hand, the GRP per capita is high (in 2017, the Republic ranked 12th among the constituent entities of the Russian Federation in terms of this indicator), and the per capita incomes correspond to the average level for Russia, but on the other hand, unemployment rate exceeding the national average and low economy diversification do not allow the Republic to approach the leaders of economic growth. The extraction of minerals (oil, gas, coal), which accounted for 37% of the GRP in 2017, is the main driver of the industrial production and the GRP of the Republic. Together with the sub-sector "Production of petroleum products", the extractive sector generates two-thirds of the industrial output of the Republic.
- The share of mandatory expenditures will be kept under control amid waning tax base;
- The tax revenues planning approaches will remain conservative;
- The debt policy will remain conservative.
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:
- A decline in the share of mandatory budget expenses;
- Further decline in the debt load;
- Sustainable growth of the internal budget liquidity.
A negative rating action may be prompted by:
- Budget deficit exceeding 5% of TNTR;
- The debt to operating balance ratio exceeding 190% in 2019;
- A change in the debt policy in favor of short-term bank loans.
Komi Republic, 35011 (ISIN RU000A0JUN81), maturity: November 27, 2019, issue volume: RUB 10.1 bln — A-(RU);
Komi Republic, 35012 (ISIN RU000A0JVKF9), maturity: June 23, 2021, issue volume: RUB 11 bln — A-(RU);
Komi Republic, 35013 (ISIN RU000A0JWZM1), maturity: November 16, 2022, issue volume: RUB 6.18 bln — A-(RU);
Komi Republic, 35014 (ISIN RU000A0JXUD9), maturity: June 25, 2024, issue volume: RUB 10 bln — A-(RU).
Rationale. ACRA is of the opinion that the above bonds issued by the Komi Republic are senior unsecured debt instruments, which credit ratings are equal to that of the Komi Republic.
The credit ratings were assigned to the Komi Republic and bonds (ISIN RU000A0JUN81, ISIN RU000A0JVKF9, ISIN RU000A0JWZM1, ISIN RU000A0JXUD9) issued by the Komi Republic 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 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 assigned to the Komi Republic and the credit ratings assigned to the government bonds (ISIN RU000A0JUN81, ISIN RU000A0JVKF9, ISIN RU000A0JWZM1, ISIN RU000A0JXUD9) issued by the Komi Republic were first published by ACRA on September 5, 2017 and March 5, 2018, respectively.
The credit rating of the Komi Republic and its outlook, as well as the credit ratings assigned to the government bonds (ISIN RU000A0JUN81, ISIN RU000A0JVKF9, ISIN RU000A0JWZM1, ISIN RU000A0JXUD9) issued by the Komi Republic 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 Komi Republic, 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 Komi Republic participated in their assignment.
No material discrepancies between the provided data and the data officially disclosed by the Komi Republic in its financial reports have been discovered.
ACRA provided no additional services to the Government of the Komi Republic. No conflicts of interest were discovered in the course of credit rating process.