The credit rating of the Kemerovo Region – Kuzbass (hereinafter, the Region) is based on the Region’s moderately low level of debt burden combined with a significant share of capital expenditures in budget expenditures. The rating is constrained by the dependence of economic and budgetary indicators on the dominant industry in the Region (coal mining) and the negative modified budget deficit in the current and forecast periods, indicating the need for debt financing.
The change in the credit rating outlook from “Stable” to “Negative” reflects ACRA's expectations of an increase in the debt burden in 2021–2022 above 30% of current income due to financing of projected deficits.
The Region is part of the Siberian Federal District and is home to 2.65 million people (1.8% of Russia’s total population). According to the Region, its GRP amounted to RUB 1.253 tln in 2019, nearly 1.2% of Russia’s total GRP.
Key rating assessment factors
The debt burden is expected to rise to a moderately low level. According to the Agency's estimates, due to the expected decrease in the Region's internal budget revenues and the need to finance expenses, the debt-to-current revenue ratio of the Region may increase from 23% at the end of 2019 to 33% at the end of 2020 and 40% at the end of 2021.
Since the beginning of 2020, the Region's debt has increased by RUB 6 bln and amounted to RUB 39 bln as of December 1, 2020. The debt profile includes budget loans (41%), bonds (23%), bank loans (15%), other debt obligations (about 18%), and guarantees. On December 15, 2020, the Region entered into an agreement with the Ministry of Finance of Russia for the provision of a budget loan for refinancing a loan from the Federal Treasury Department.
The largest volume of repayments falls on 2022, when the Region will have to repay or refinance about a quarter of its debt (RUB 10 bln). Another 10% of the debt (RUB 4 bln) is expected to be repaid in the rest of 2020 and 2021. The smooth debt repayment schedule is supported in part by additional agreements on budget loans restructured in 2017 made with the Russian Ministry of Finance in October 2020.
Interest expenses are not burdensome for the Region: the ratio of average interest expenses to total budget expenses (excluding subventions) for 2017–2021 is about 1%.
Amid increasing expenses, the decrease in internal revenues is partly offset by growing gratuitous transfers. Over 10M 2020, the cumulative decrease in tax and non-tax revenues (TNTR) of the Region amounted to 22.8% (-RUB 25 bln). Volatility in the coal market (the main market for the Region's economy) and the general decline in demand for fuel and energy resources in 2020 caused by the coronavirus pandemic reduced income tax revenues by 43.7% (-RUB 20 bln) and mineral extraction tax revenues by 36.1% (-RUB 2 bln). The decrease in property tax revenues was 10.8% (-RUB 1 bln) compared to the same period last year. However, the volume of gratuitous trasfers increased by 84.9% (+RUB 20 bln), including subsidies that more than doubled compared to 10M 2019. Budget expenditures increased by 27.1% (+RUB 32 bln). The budget deficit as of November 1, 2020 amounted to RUB 22 bln.
In accordance with the Region's Budget Law1, by the end of 2020, the deficit should amount to 29% of the TNTR (RUB 33 bln). Two thirds of the deficit are planned to be financed by account balances and funds held in deposits. The rest will be covered by debt financing.
ACRA believes that the high flexibility of budget expenditures may allow the Region to reduce the forecasted deficit, for example, by reducing planned capital expenditures.
The share of internal revenues in the Region's budget has remained moderately high despite the significant forecasted increase in gratuitous transfers: the averaged2 share of internal revenues in 2017–2021 is expected to be 79%. The average share of capital expenditures in the same period should not exceed 18%. The average ratio of current account balance to current revenues is projected at 8%, while the current account balance for 2020 will become negative, which could lead to financing of a part of current expenses by raising debt. The ratio of the averaged modified budget deficit to averaged current revenues is expected to be -4%.
The amount of available liquidity is to fall. As of December 1, 2020, free liquidity available to the Region amounted to RUB 10.7 bln, and almost entire amount was held in bank deposits. However, this amount will most likely be spent by the end of this year to cover the expected deficit.
As of December 1, 2020, the Region has no committed but undrawn credit lines for a period of more than one year.
The Region’s economy is highly concentrated on the mining sector. The Region’s economy relies primarily on coal mining and related industries. Traditionally, the Region’s largest taxpayers are coal and metal companies. In 2019, seven of the ten largest taxpayers in the Region belonged to these industries. The main contribution to tax revenues comes from the coal industry (according to ACRA's estimates, 39% in 2017 and 2018, and 32% in 2019). The Region’s average GRP per capita in 2015−2018 was 77% of the national average. The ratio of averaged wages to regional subsistence minimum in 2016–2019 exceeded 3.5.
1 Law of the Kemerovo Region — Kuzbass dated December 11, 2019 No. 137-ОЗ (as amended on December 8, 2020) "Regional Budget for 2020 and 2021–2022"
2 Hereinafter, averages are calculated according to the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation.
Key assumptions
- Internal revenues declining by no more than 22% in 2020 compared to 2019;
- Budget deficit in 2020 not exceeding 36% of TNTR:
- Total budget expenses increasing by no more than 18% and capital expenditures declining against the planned volume;
- Financing budget deficit with accumulated liquidity.
Potential outlook or rating change factors
The Negative outlook assumes that the credit rating may be downgraded within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- a significant reduction in budget expenditures relative to the planned level;
- achieving a sustainable ratio of debt to current revenues below 30%;
- achieving a stable positive value of the modified budget deficit.
A negative rating action may be prompted by:
- execution of the regional budget in 2020 with a deficit exceeding the forecasted level;
- an increase in the debt burden above 40% of the current revenues amid short-term borrowings;
- a significant decrease in the volume of the current account balance.
Issue ratings
Kemerovo Region, 35002 (ISIN RU000A0ZYB40), maturity date: September 26, 2024, issue volume: RUB 9 bln — A-(RU).
Rationale. In ACRA’s opinion, the bond listed above is a senior unsecured debt instrument, the credit rating of which corresponds to the credit rating of the Kemerovo Region − Kuzbass.
Regulatory disclosure
The credit ratings have been assigned to the Kemerovo Region – Kuzbass and the bond (RU000A0ZYB40) issued by the Kemerovo Region 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 the Analytical Credit Rating Agency within the Scope of Its Rating Activities. In the course of assigning a credit rating to the bond issue above, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation has also been used.
The credit rating of the Kemerovo Region – Kuzbass and the credit rating of the bond (RU000A0ZYB40) issued by the Kemerovo Region were first published by ACRA on August 29, 2017, and October 2, 2017, respectively. The credit rating of the Kemerovo Region – Kuzbass and its outlook, as well as the credit rating of the bond (RU000A0ZYB40) issued by the Kemerovo 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 data provided by the Kemerovo Region – Kuzbass, 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 Kemerovo Region – Kuzbass Government participated in their assignment.
No material discrepancies between the provided data and data officially disclosed by the Kemerovo Region – Kuzbass in its financial reports have been discovered.
ACRA provided no additional services to the Kemerovo Region – Kuzbass Government. No conflicts of interest were discovered in the course of credit rating assignment.
