The credit rating of the Tambov Region (hereinafter, the Region) is based on limited flexibility of budget expenses, low liquidity, and regional economic development indicators that lag behind the national averages. The rating is supported by the Region’s countercyclical economy and balanced debt repayment schedule, which is largely the result of restructuring of commercial debt.
The Tambov Region is located in the Central Federal District and is home to slightly less than 1% of Russia’s population. The Region accounts for about 0.5% of the country’s total gross regional product (GRP). The Region estimates that its GRP may amount to RUB 405.8 bln in 2021, with agribusiness (including agriculture and food production) generating around one-third of this.
KEY ASSESSMENT FACTORS
Relatively stable tax base and significant dependence on federal transfers. In 8M of 2021, the Region’s tax and non-tax revenues (TNTR) reached 67% of the target for 2021, having grown by 27% compared to 8M 2020. Among other things, this was due to profit tax increasing by 56%, which was mainly the result of growth in receipts from food production companies. At the same time, expenses grew less (by 3%), and thanks to this the Region recorded a considerable intermediate surplus of RUB 3.8 bln.
The Region’s budget law for this year envisages the budget being executed without a deficit.
Personal income tax dominates the structure of the Region’s tax revenues, averaging 35.7% for 2017−2021. The prevalence of non-volatile tax indicates the stability of the regional budget’s tax base, but the high share of agribusiness in the Region’s economy means that the budget is dependent on weather and climate factors.
The ratio of the averaged1 modified budget deficit to current revenues of the regional budget is just below zero. When coupled with the averaged ratio of the current account balance to current revenues, which amounts to 10.3% in 2018–2022, this indicates that current revenues are sufficient to cover current expenditures, and that the Region needs to raise funds to finance its capital expenditures. The averaged share of capital expenditures in total expenditures for 2018–2022 will be 18%. The Region finances more than half of its capital expenditures using transfers from the federal budget.
The averaged share of TNTR in total budget revenues (excluding subventions) for 2018–2022 will amount to 55%.
1 Hereinafter, averages are calculated according to the Methodology for Assigning Credit Ratings to Regions and Municipal Entities of the Russian Federation.
The balanced debt repayment schedule is the result of restructuring of commercial debt. In August 2021, the Region received a RUB 8.4 bln budget loan to replace its commercial borrowings. These funds were used to substitute commercial loans and provide a budget loan to the city of Tambov. In addition, it is planned to substitute the part of bonds that will be amortized.
Therefore, as of October 1, 2021, the structure of the Region’s debt was dominated by budget loans (63%), with bonds accounting for the rest of the debt. As of the end of this year, the share of bonds will decline to 32% due to amortization.
This debt restructuring will enable the Region to repay no more than 11% of its debt annually over the next three years.
The Region’s public debt servicing expenditures are not burdensome on its budget (averaged interest expenditures will amount to 3% of averaged total budget expenditures, excluding subventions, for 2018–2022). The ratio of debt to the Region’s current revenues is projected to be 39% at the end of this year.
Limited budget liquidity. The Region’s account balances have grown since May of this year. Part of these funds is a budget loan, which will be used to refinance bonds by the end of this year. In addition, liquidity has grown due to what is probably a one-time significant increase in profit tax payments. Consequently, the liquidity assessment is based on historically low account balances and the existence of a certain volume of undrawn credit lines provided by banks that can be used for more than a year.
The Region uses funds of autonomous and state-owned institutions and a loan from the Federal Treasury Department (FTD) to manage its liquidity. However, so far in 2021 the Region has not raised any funds from the FTD.
The dominance of agribusiness, an industry that usually lacks cyclicality, results in low regional economic development. Agriculture accounts for 22−26% of the GRP structure annually. Together with the food industry, agriculture can form up to a third of the Region’s GRP. This industry is not high-margin, but it is not cyclical, which has a stabilizing effect on the Region’s economy and budget.
Despite the agricultural and industrial specifics of the Region, tax revenues are diversified. In 2020, the maximum contribution to budget revenues, according to ACRA, was made by the public sector, accounting for 22%. Manufacturing accounted for 20%, while agriculture, forestry, and hunting and fishing accounted for 12%. The total share of agribusiness, according to ACRA, did not exceed 18% in 2020.
In 2016–2020, the ratio of the averaged wage to the averaged regional living wage grew and reached 2.8 in 2020. At the same time, the unemployment rate was lower than the national average. The Region’s economy is characterized by relatively low GRP per capita, while there is a growing lag behind the national average (67% in 2015, 55% in 2019).
KEY ASSUMPTIONS
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No budget deficit in 2021;
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Continued strong dependence on federal transfers for budget revenues;
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Maintaining a high share of federal transfers in capital expenses.
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:
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Stable growth of budget liquidity;
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Increased share of TNTR in total revenues (excluding subventions);
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Higher current account balance due to growth of budget revenues.
A negative rating action may be prompted by:
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Growth of current expenses that is not accompanied by higher current revenues;
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Substantial debt load increase (to above 55% of current revenues).
ISSUE RATINGS
Tambov Region Government Bond, 35002 (ISIN RU000A0JWT75), maturity date: September 20, 2023, issue volume: RUB 1.6 bln — BBB+(RU).
Tambov Region Government Bond, 35003 (ISIN RU000A0JXVH8), maturity date: July 12, 2024, issue volume: RUB 3.5 bln — BBB+(RU).
Tambov Region Government Bond, 35004 (ISIN RU000A0ZYJ18), maturity date: December 5, 2025, issue volume: RUB 3.0 bln — BBB+(RU).
Rationale. In ACRA’s opinion, the bonds of the Tambov Region above are senior unsecured debt instruments, the credit ratings of which correspond to the credit rating of the Tambov Region.
REGULATORY DISCLOSURE
The credit ratings of the Tambov Region and the bonds issued by the Tambov Region (ISIN RU000A0JWT75, RU000A0JXVH8, RU000A0ZYJ18) have been assigned under the national scale for the Russian Federation based on the Methodology for Assigning Credit Ratings to Regions and Municipal Entities 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 Tambov Region and bonds issued by the Tambov Region (ISIN RU000A0JWT75, RU000A0JXVH8, RU000A0ZYJ18) were published by ACRA for the first time on July 3, 2017, July 14, 2017, July 11, 2017, and December 13, 2017, respectively. The credit rating of the Tambov Region and its outlook and the credit ratings of the bonds issued by the Tambov Region (ISIN RU000A0JWT75, RU000A0JXVH8, RU000A0ZYJ18) are expected to be revised within 182 days following the publication date of this press release as per the Calendar of sovereign credit rating revisions and publications.
The credit ratings are based on data provided by the Tambov Region, 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 solicited, and the Administration of the Tambov Region 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 Administration of the Tambov Region. No conflicts of interest were identified in the course of credit rating assignment.
