The credit rating of the Khabarovsk Krai (hereinafter, the Region) is based on a growing debt load coupled with a significant share of short-term debt and low available liquidity. The budget profile of the Region is characterized by a growing need for debt financing and a negative balance of current operations over the forecast horizon. ACRA notes the moderate development indicators of the regional economy and its partial dependence on the public sector.
The Khabarovsk Krai is part of the Far Eastern Federal District and is home to about 1.3 million people (0.9% of Russia’s population). The Region’s GRP reached RUB 803 bln in 2019, which is about 1% of the total GRP of all Russian regions.
Key rating assessment factors
An increase in transfers partially compensated for significant growth of budget expenses. The Region’s revenues in 2020 amounted to RUB 128.0 bln, which is 15% higher than the indicator for 2019. At the same time, tax and non-tax revenues (TNTR) declined by 1%. Transfers to the Region’s budget grew by 58% in 2020 to RUB 49.2 bln, while budget expenses increased by 16% and reached RUB 132.4 bln. The largest increase in spending was recorded in the areas of social policy (more than 1.5x growth) and healthcare (more than 25% growth). The budget deficit amounted to RUB 4.3 bln (around 5% of TNTR). The lion’s share of the deficit was financed by borrowings.
As of the end of Q1 2021, the Region recorded a budget surplus of RUB 1.3 bln due to considerable growth of the income side of the budget compared to the same period last year.
According to the Law on the Region’s Budget1, TNTR is expected to grow by 6% in 2021 compared to last year. However, aggregate budget income should decline by 5% to RUB 121.7 bln due to a 22% decrease in the size of transfers. The Region plans to reduce its budget expenses by only 2%. The budget deficit is expected to reach 9% of TNTR and is to financed mainly by raising debt.
1 Law of the Khabarovsk Krai dated December 9, 2020 No. 125 (with amendments as of March 31, 2021) “On the regional budget in 2021 and the planned period of 2022 and 2023”.
In ACRA’s opinion, the current uncertainty due to the coronavirus pandemic may provoke an increase in budget expenditures compared to the level recorded in 2020. Although the possible increase in spending will not be as significant as in the past year, it may result in the deficit growing to 15% of TNTR (before deducting balances in budget accounts and expenses for addressing the consequences of the pandemic).
For 2017–2021, the averaged2 share of the Region’s internal revenues in the total budget revenues (excluding subventions) will be 72%, and the averaged share of capital expenditures in overall budget expenditures (excluding subventions) will be 14%. The Region’s budget needs debt financing as the averaged modified budget deficit for the above period will amount to -6.0%. At the end of 2021, the balance of current operations may be negative, while the averaged ratio of the balance of current operations and current revenues will remain positive and amount to 1% for 2017 to 2021. The negative forecasted balance of current operations associated with a possible increase in the Region’s expenses, as well as a negative modified budget deficit, indicate the Region’s additional need for debt financing.
2 Hereinafter, averages are calculated according to the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation.
High debt refinancing risks may be reduced through restructuring. In 2020, the Region’s public debt increased by 6% to reach RUB 54.8 bln. This debt included bank loans (65%), budget loans (27%), bonds (7%), and guarantees (less than 1%). The debt repayment schedule is unbalanced, with peak periods occurring in the next two years. As of January 1, 2021, the largest repayment was scheduled for 2022 and amounted to 45% of the Region’s total debt.
By May 1, 2021, the repayment schedule was practically unchanged, however, the absolute value of the Region’s debt had grown by RUB 3 bln due to it obtaining additional bank loans.
The considerable share of short-term debt indicates that the Region has significant debt refinancing risks. If part of the debt is restructured as a result of the implementation of the 2021 Address of the President of the Russian Federation, then the share of short-term debt should decline and this may lead to lower refinancing risks.
ACRA believes that by the end of 2021, the Region’s ratio of debt to current revenues will reach 59% due to the financing of the projected deficit. At the same time, its interest expenses continue to be insignificant: the ratio of interest expenses averaged for 2017–2021 and total budget expenses (excluding subventions) will be around 3%.
As of January 1, 2021, the amount of funds held by the Region in its accounts amounted to RUB 1.0 bln. Since the beginning of 2020, average monthly balances in budget accounts, including funds of autonomous and budgetary institutions, covered about 11% of monthly expenses.
Moderate economic development indicators that are partly dependent on the public sector. The non-governmental sector of the Region’s economy is diversified. Over the past four years, a significant share of tax revenues (the averaged share for 2017–2020 is 20%) have come from freight transportation and communications-related sectors, while trade has provided about 14% of the tax revenue. Those sectors that are funded by the budget (including state governance, education, healthcare and cultural activities), according to ACRA’s estimates, generated about 24% of tax revenues in 2017–2020 and contributed the most to regional budget revenues.
The Region’s averaged GRP per capita was 95% compared to the national average in 2016–2019. The ratio of averaged wage values to regional subsistence minimum in 2017–2020 exceeded 300%.
By the end of 2020, the averaged unemployment rate in the Region for the past four years, calculated according to the ILO’s methodology, was 4%. Unemployment in the Region is consistently below the national average.
- Reduction of budget revenues in line with the law on the Region’s budget;
- Expenses growing by no more than 1% in 2021 compared to 2020;
- Budget deficit no higher than 15% of TNTR;
- Partial use of funds of autonomous and budgetary institutions to finance the Region’s budget deficit;
- Emergency financial support from the federal budget if necessary;
- Increase in debt not exceeding 20% in 2021 compared to the previous year.
Potential outlook or rating change factors
The Stable outlook assumes that the credit rating will most likely remain unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- Lower debt refinancing risks;
- Lower debt load.
A negative rating action may be prompted by:
- Further decline of the balance of current operations;
- Increased need for debt financing;
- Further growth of short-term debt.
Khabarovsk Region, 35007 (ISIN RU000A0ZZQQ0), maturity date: October 24, 2025, issue volume: RUB 5 bln — BB+(RU).
Rationale. In ACRA’s opinion, the above bond issue of the Khabarovsk Krai is a senior unsecured debt instrument, the credit rating of which corresponds to the credit rating of the Khabarovsk Krai.
The credit ratings have been assigned to the Khabarovsk Krai and the bond issued by the Khabarovsk Krai (ISIN RU000A0ZZQQ0) 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 Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments on the National Scale for the Russian Federation was also applied to assign credit ratings to the above issues.
The credit ratings of the Khabarovsk Krai and the issue of government securities of the Khabarovsk Krai (ISIN RU000A0ZZQQ0) were published by ACRA for the first time on June 19, 2020. The credit rating of the Khabarovsk Krai and its outlook as well as the credit rating of the issue of government securities of the Khabarovsk Krai (ISIN RU000A0ZZQQ0) 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 Khabarovsk Krai, information from publicly available sources (the Ministry of Finance, the Federal State Statistics Service, and the Federal Tax Service), and ACRA’s own databases. The credit ratings are unsolicited, and the Government of the Khabarovsk Krai participated in their assignment.
In assigning the credit ratings, ACRA used only information, the quality and reliability of which was, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to the Government of the Khabarovsk Krai. No conflicts of interest were discovered in the course of credit rating assignment.