The credit rating of the Krasnodar Krai (hereinafter, the Region) is based on the Region’s moderately low debt load, low debt refinancing risk in the medium term, stable budget indicators, moderately high diversification of tax revenues, and high internal budget liquidity. The rating is limited by some medium socioeconomic development indicators.
The Region is part of the Southern Federal District. The Region accounts for nearly 4% of Russia’s population and around 3% of the aggregate GRP of Russian regions. The Region is a consistent leader in terms of agricultural production in Russia. It is also a major holiday destination for Russians and an important transportation hub.
key assessment factors
Moderately low debt load and low refinancing risk. According to ACRA, at the end of 2021, the ratio of the Region’s debt to current revenues will (according to ACRA’s methodology) amount to 32%, and remain at this level in 2022. This indicates a moderately low debt load. As of October 1, 2021, the Region’s debt included budget loans (71% of the Region’s debt obligations) and bonds (29%).
In 2021, the Government of the Russian Federation restructured a budget loan provided to the Region a year earlier to refinance a loan from the Federal Treasury Department (FTD). The current debt repayment schedule (as of October 1, 2021) indicates low refinancing risk. In 2021−2023, the annual level of repayment (refinancing) does not exceed 7% of the Region’s total debt. The high share of budget loans in the Region’s debt means that debt servicing costs are not burdensome for the regional budget (the averaged level1 of interest expenses in 2018−2022 will be around 1% of total budget expenses, excluding subventions).
1 Hereinafter, averages are calculated according to the Methodology for Assigning Credit Ratings to Regions and Municipal Entities of the Russian Federation.
High budget liquidity. The Region meets its obligations on time and places temporarily available funds in bank deposits. As of October 1, 2021, the Region’s budget funds held in bank accounts exceeded average monthly expenses over eight months of 2021 by more than twofold.
Stable budget profile indicators. The averaged share of tax and non-tax revenues (TNTR) in total revenues (excluding subventions) in 2018−2022 will be around 81%. The averaged ratio of the balance of current operations to current revenues (according to ACRA’s methodology) for this period will be 10%, while the ratio of the averaged modified budget deficit to current revenues will be close to zero. These indicators show that current income is sufficient to cover current expenses and finance capital expenses. Averaged capital expenses in 2018−2022 will amount to 13% of total budget expenses (excluding subventions). The Region finances capital expenses primarily with internal funds, which allows it to consider these expenses as a possible reserve for reducing expenses should regional budget revenues decrease.
The law on the Region’s budget for 2021 foresees execution of the budget with a deficit of around 9% of TNTR. The deficit will mainly be financed by funds in accounts accumulated in previous years. According to ACRA’s assessments, the actual deficit in 2021 may be lower than the target.
The intermediate surplus of the regional budget as of 8M 2021 was RUB 26 bln, which is five times larger than the indicator recorded for the same period last year. Total income over 8M 2021 increased by 16% compared to the same period in 2020, TNTR grew by 26%, and expenses increased by 5%.
Diversified economy with development indicators close to the national averages. The major share of the Region’s GRP is generated by sectors such as transport and communications (large pipelines run across the Region), trade and repairs, and agriculture (the Region is the leader in Russia in terms of agricultural production). Additionally, manufacturing (including the food industry, whose growth prospects are determined by agricultural processing, and oil refining) and services also contribute greatly to the Region’s GRP. Tax revenues from this sector are uneven, which is due to the specifics of tax legislation and the presence of consolidated groups of taxpayers in the Region. The largest share of tax revenues in the regional budget is generated by the wholesale and transport (including pipeline transport) sectors. According to ACRA, in 2017−2020, these sectors generated about 13% and 18% of the regional budget’s tax revenues, respectively. GRP per capita remains below the national average (70% in 2019). Unemployment in the Region fell from 6.0% in 2015 to 4.8% in 2019, and then increased to 5.7% in 2020. In 2020, the average monthly salary (for the working-age population) in the Region exceeded the regional subsistence minimum by three times.
KEY ASSUMPTIONS
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TNTR increasing by 8% in 2021 compared to 2020, and then increasing by 6% in 2022;
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Execution of the budget in 2021 with a 7% deficit;
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Maintaining a conservative debt policy;
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Maintaining high budget liquidity.
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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Debt to current revenues ratio falling below 30%;
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Increased flexibility of budget expenses;
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Reduction in the gap between the Region’s economic indicators and the national averages.
A negative rating action may be prompted by:
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Decrease in the budget’s self-sufficiency;
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Debt to current income ratio increasing above 50%;
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Capital expenses declining below 10%;
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Significant decrease in budget liquidity.
ISSUE RATINGS
Krasnodar Krai, 35001 (ISIN RU000A0JXYS9), maturity date: August 9, 2024, issue volume: RUB 10.0 bln — АA-(RU).
Krasnodar Krai, 35002 (ISIN RU000A0ZZ8X4), maturity date: June 3, 2025, issue volume: RUB 10.0 bln — АA-(RU).
Krasnodar Krai, 35003 (ISIN RU000A1011B5), maturity date: November 12, 2026, issue volume: RUB 10.0 bln — АA-(RU).
Rationale. In ACRA’s opinion, the bond issues of the Krasnodar Krai are senior unsecured debt instruments, the credit ratings of which correspond to the credit rating of the Krasnodar Krai.
REGULATORY DISCLOSURE
The credit ratings have been assigned to the Krasnodar Krai and the bonds issued by the Krasnodar Krai (RU000A0JXYS9, RU000A0ZZ8X4, RU000A1011B5) 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 rating of the Krasnodar Krai and credit rating of the government securities of the Krasnodar Krai (RU000A0JXYS9) were published by ACRA for the first time on October 18, 2017. The credit ratings of the government securities (RU000A0ZZ8X4, RU000A1011B5) were published by ACRA for the first time on October 17, 2018 and November 12, 2019, respectively. The credit rating of the Krasnodar Krai and its outlook as well as the credit ratings of the government securities of the Krasnodar Krai (RU000A0JXYS9, RU000A0ZZ8X4, RU000A1011B5) 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 were assigned based on data provided by the Krasnodar 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 solicited, and the Administration of the Krasnodar 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 Administration of the Krasnodar Krai. No conflicts of interest were discovered in the course of credit rating assignment.
