The credit rating of the Orenburg Region (hereinafter, the Region) is based on the Region’s strong liquidity combined with the moderately high operating efficiency of the regional budget and low debt load. The credit rating is limited by moderate economic development compared to the national average and the dependence of economic and budget indicators on the dominant industry in the Region.
The Orenburg Region is located in the Volga Federal District at the crossroads of 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
Low debt load with minimal refinancing risk. According to ACRA, the Region’s debt to current expense ratio should be within 24-26% in 2019-2020 (in absolute terms, debt should be RUB 22-24 bln). As of December 1, 2019, the Region's debt amounted to RUB 22.2 bln and consisted of bonds (43%) and budget loans (57%). Due to this debt structure, interest expenses are not burdensome for the Region. Interest expenses in 2016-2020 should average1 less than 2% of total budget expenses, excluding subventions. Most of the Region’s debt (70%) is due after 2023. The Region needs to refinance an average of 7% of its total debt each year from 2019 to 2022. In the remaining period of 2019, the Region will have to repay less than 1% of its total debt.
1 Hereinafter, averages are calculated according to the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation.
High budget liquidity. ACRA’s high assessment of the Region’s liquidity ratio is due to the large amount of funds in treasury accounts (RUB 13 bln as of December 1, 2019) together with the current volume of undrawn credit lines with a drawing period of more than a year in banks (RUB 3 bln). Over the past 15 months, account balances have regularly exceeded regional budget expenses by approximately 40%. Since July 1, 2019, the Region has placed funds in deposits. As of December 1, 2019, accumulated liquidity covered almost two-thirds of the Region's total debt. Based on the approved budget laws, the Region will use the accumulated funds to partially finance its 2019 and 2020 deficits. The Region has not raised funds from the Federal Treasury since the beginning of the year.
Moderately strong budget profile with moderately high operating efficiency. The average value of the budget’s operating efficiency increased by almost 3.5x from 2016 to 2018 and amounted to 19%. As current budget expenses in 2019-2020 are projected grow at a rate higher than current revenues, ACRA expects a reduction in operating efficiency to 14%. In 2016-2018, the average share of tax and non-tax revenues (TNTR) in budget revenues (excluding subventions) amounted to 84%. In 2019, this figure should fall to 82% amid growth in gratuitous receipts. The ratio of the modified budget deficit to current revenues should be positive at the end of 2019, indicating that there is no need for debt financing. According to the Region, the budget deficit in 2019 should amount to about 4% of TNTR (RUB 2.7 bln).
Moderately developed economy concentrated on hydrocarbon production. The Region's economy is based on the production of hydrocarbons and related industries. In 2018, 12 of the Region’s 20 largest enterprises by revenue worked in these industries. The main contributors to tax revenues from 2015 to 2018 were the crude oil and gas production (30-44%) and wholesale trade industries (to a large extent, trade in hydrocarbons; 11-16%). The Region’s GRP per capita in 2014-2017 averaged 82-84% compared to national figures. The average wage to regional living wage ratio was 3x in 2015-2018, and the Region’s unemployment rate is lower than the national average.
Key assumptions
- Executing the regional budget with a deficit lower than 4-5% TNTR in 2019-2020;
- Maintaining conservative budget and debt policies;
- Current ruble price for hydrocarbons maintained in the medium term;
- Maintaining a high average wage to regional living wage ratio.
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:
- Increased economic diversification;
- Increased operating efficiency of the regional budget with no need to refinance debt;
- Future growth in liquidity.
A negative rating action may be prompted by:
- Negative changes in the current hydrocarbon market with the inability to reduce current budget expenses;
- Accumulated liquidity used to finance current budget expenses.
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).
Rationale. In ACRA’s opinion, the bonds listed above are senior unsecured debt instruments, the credit ratings of which correspond to the credit rating 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.
