The credit rating of the Novgorod Region (hereinafter, the Region) is based on the Region’s moderate economic development indicators and budget profile, as well as medium debt load coupled with an irregular debt repayment schedule and average budget liquidity.
The Novgorod Region is located in the North-Western Federal District and borders four other regions of the Russian Federation. In 2018, 0.4% of Russia’s population lived in the Region; its gross regional product (GRP) was 0.3% of Russia’s total GRP. The main railroads and highways connecting Moscow, St. Petersburg, and the Baltic countries pass through the Region.
Key rating assessment factors
Medium debt load and significant refinancing risk. The Region’s debt to current income ratio fell from 52% at the end of 2018 to 45% at the end of 2019. This is due to an increase in income tax revenues and current transfer revenues. According to ACRA, at the end of 2020, due to a possible reduction in tax and non-tax revenues (TNTR) and new loans to finance the budget deficit, debt to current income in the Region could increase to 62%, indicating a moderate level of debt load according to ACRA’s methodology. At the end of 2020, budget loans should account for 56% of the Region’s debt obligations, while bank loans should account for 44%. In 2020, there are no risks of debt refinancing and in 2021, the Region will have to repay or refinance all of its bank debt. Repayment is scheduled to take place in stages over the course of the year, which partially reduces the refinancing risk. Debt servicing expenses are not a burden on the regional budget due to the high share of budget loans in the Region’s debt structure (the average level1 of interest expenses in 2016–2020 should amount to less than 2% of total budget expenses excluding subventions).
1 Hereinafter, averages are calculated according to the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation.
Average budget liquidity. The Region has enough liquidity to meet its expense commitments on time, including interest payments. As of May 1, 2020, account balances exceeded average monthly budget expenses by 1.2x for the four-month period in 2020. The Region’s government may borrow a short-term loan from the Federal Treasury Department to cover possible cash gaps.
Moderate budget profile indicators. The average share of TNTR (excluding subventions) for 2016–2020 in the Region’s total revenues should amount to 73%. The averaged ratio of the current account balance to current income should equal 6% for this period, while the ratio of the modified budget deficit to current income should be -2%. These indicators show that current income is enough to cover current expenses and that the Region needs to resort to borrowing only in order to finance capital expenses. Average capital expenses in 2016–2020 account for 13% of total budget expenses and are 30–40% financed by transfers from the federal budget.
Diversified economy with a developed chemical industry. The largest local enterprise is PJSC Acron, a fertilizer manufacturer that generates about 40% of the total shipped products of the Region’s manufacturing sector. Tax revenues from the chemical industry equal 6-15% of the Region’s tax revenues for 2016-2019. Other major sectors of the Region’s economy are transport and trade, as well as wood processing and the production of paper and paper products. The Region’s GRP per capita in 2018 was 75% of the national average. The average salary in the Region exceeded the regional subsistence minimum by 2.7x in 2019. The unemployment rate in the Region is lower than the national average. This may lead to a shortage of personnel and a possible increase in social spending given the decrease in and the aging of the Region’s population.
Key assumptions
- Decrease in TNTR in 2020 by no more than 15% of the 2019 level;
- Decrease in budget expenses if actual revenues are lower than planned.
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:
- Improvement in the commercial debt repayment schedule (reduced refinancing risk in relation to a substantial share of debt within one year);
- Lower relative debt load;
- Stable growth of budget liquidity.
A negative rating action may be prompted by:
- Increase in current expenses not supported by an increase in current budget revenues.
Issue ratings
No outstanding issues have been rated.
Regulatory disclosure
The credit rating has been assigned to the Novgorod Region under the national scale for the Russian Federation based on the Methodology for Credit Rating Assignment to Regional and Municipal Authorities of the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.
The credit rating of the Novgorod Region was published by ACRA for the first time on July 27, 2018. The credit rating of the Novgorod Region is 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 rating was assigned based on data provided by the government of the Novgorod 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 rating is unsolicited, and the government of the Novgorod Region participated in its assignment.
No material discrepancies between the provided data and data officially disclosed by the government of the Novgorod Region in its financial reports have been discovered.
ACRA provided no additional services to the government of the Novgorod Region. No conflicts of interest were discovered in the course of credit rating assignment.
