The credit rating of the Komi Republic (the Republic, or the Region) is based on the high share of the budget’s own revenues, moderately low debt and medium liquidity of the budget. The rating level is constrained by the budget’s dependence on the mining sector and expectation of debt increase.
The Republic is located in the North-Western Federal District. A part of its territory belongs to the Far North area. About 830 thousand people (0.6% of the total Russian population) live in the Region. The Republic’s share in the total GRP of the Russian regions is 0.8%.
Key rating assessment factors
Self-sufficient budget with moderately high operating efficiency. The Republic’s budget is highly self-sufficient (in 2016-2020, the averaged1 share of own revenues in the total revenues of the Region excluding subventions will equal 92%). In 2016-2020, the averaged ratio of the current transactions balance to current revenues (according to the ACRA methodology) should run into 12%, which suggests that current revenues are sufficient to cover current expenses. The averaged share of capital expenditures in the above period will be around 10% of total expenses (excluding subventions); on average, the Region finances three quarters of its capital expenditures from its own funds, while non-repayable federal budget funds cover only a third of such expenses. The modified budget deficit to current revenues ratio will be positive (2%) in 2016-2020 as capital expenditures are financed primarily without raising debt.
In 2019, the Republic's budget performance resulted in a surplus of RUB 4.3 bln. According to the 2020 budget law, revenues will remain at the previous year’s level, while expenses will see a 14% increase as compared to last year, with the deficit reaching RUB 7.4 bln (around 9.7% of own revenues). The deficit is planned to be financed by raising loans from banks. According to ACRA estimates, income tax revenues may decline by 10% to 15% in 2020 as compared to the 2019 figures due to potential adverse changes in the market environment for the energy commodities.
1 Hereinafter, the averaging method was used as defined in the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation.
Moderately low debt and balanced maturities. As of the beginning of 2020, The Region’s debt, that was down to 30% from 34% of the current revenues in 2019, comprised bonds (73%), budget loans (26.9%), and guarantees (0.1%). The debt to current revenues ratio should increase to 40% by the end of 2020, and can reach 44% in 2022. The debt to tax and non-tax revenues ratio of the Republic’s budget has decreased from 38% to 33% in 2019. Although an increase to 43% by the end of 2020 is projected, the ratio will stay below the limit established in the agreement with the Ministry of Finance of Russia regarding budget loan restructuring. The Republic will have to repay 12% of its debt obligations in 2020, and 25% in 2021. Debt servicing expenses are not heavy for the regional budget (the averaged interest expenses for 2016-2020 will be 3% of the total budget expenses excluding subventions). 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.
Accumulated liquidity allows financing budget expenses but is insufficient to finance the projected deficit. As of the beginning of 2020, the available balance on the budget accounts covered 107% of the Republic’s budget obligations to be repaid in the current year. The average monthly balance of the Region’s accounts equaled 1.4x of the monthly expenses in 2019. Since 2019, the Republic has been placing temporarily free funds in deposits.
Budget volatility is caused by the dependence on the largest taxpayers operating in the extractive sector. 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 generated 70% of the industrial output of the Republic in 2018. The GRP per capita is high (the Republic ranked 11th among Russia’s regions in 2017), while the Region’s average monthly wage to subsistence wage ratio exceeded 3.5x in 2018. The averaged unemployment totaled 7.6% in the above period.
- If revenues decline below the planned level in 2020, the Region will cut budget expenses rather than increase debt;
- Internal liquidity of the budget is maintained at a sufficient level.
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:
- 2020 budget deficit is at or below 3% of tax and non-tax revenues;
- Lower debt to current revenues ratio decreasing below 30%;
- Further expansion of the average wage to subsistence wage ratio in the Region;
- Sustainable growth of the internal budget liquidity.
A negative rating action may be prompted by:
- Budget deficit exceeding 10% of tax and non-tax revenues in 2020;
- An increase in current expenses of the Republic’s budget that is not accompanied an increase in current revenues;
- Debt exceeding 55% of the current revenues;
- A change in the debt policy in favor of short-term bank loans.
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 RU000A0JVKF9, RU000A0JWZM1, 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 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 RU000A0JVKF9, RU000A0JWZM1, 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 RU000A0JVKF9, RU000A0JWZM1, 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.