The credit rating of the Orenburg Region (hereinafter, the Region) is based on the budget’s moderate operating efficiency, low debt load, and smooth debt repayment schedule. The rating is limited by moderate economic development indicators compared to the national averages, and the dependence of economic and fiscal indicators on the dominant industry in the Region.
The Orenburg Region is located in the Volga Federal District at the crossroads of two continents, Europe and Asia. The Region borders five other Russian regions and Kazakhstan. 1.3% of Russia’s population lives in the Region, and it accounts for 1.2% of Russia’s total gross regional product (GRP). The Region produces around 3% of the country’s crude oil and gas annually.
KEY ASSESSMENT FACTORS
Low debt load and minimal refinancing risk. At the start of 2021, the Region’s debt to current revenues ratio was 21.7%, which corresponds to a low debt load. According to the Region’s budget execution expectations, by the end of the year this ratio will also correspond to a low debt load. As of November 1, 2021, the Region’s debt amounted to RUB 20.2 bln, and included bonds (40%) and budget loans (60%). Thanks to this, the Region’s interest expenses are not burdensome. In addition, they are partially covered by interest accrued on budget funds deposited with banks. The ratio of averaged1 interest expenses to total budget expenditures (excluding subventions) for 2018–2022 will equal to no more than 2%. The lion’s share of debt (74% of the total) is due after 2024. The Region will have to refinance no more than 8% of its debt annually in the period from 2021 to 2024. The Region does not take part in the program to replace commercial debt with budget loans as it has a lower debt load than the one established by the program. The Region can potentially receive an estimated RUB 5.87 bln worth of infrastructure budget loans. If these loans are received, the assessment of the ratio of debt to current revenues will change, however, other things being equal, this will not affect the final level of the credit rating.
1 Hereinafter, averages are calculated according to the Methodology for Assigning Credit Ratings to Regions and Municipal Entities of the Russian Federation.
Moderate operating efficiency, significant capital expenditures, and considerable internal revenues. The current budget law assumes that tax and non-tax revenues (TNTR) will grow by 15% compared to 2020 and slightly exceed 2019 TNTR. Positive TNTR growth will be primarily associated with revenues from taxes on goods and services, as well as income tax, which are expected to grow by 49% and 20%, respectively. At the same time, the expected execution of the Region’s budget in 2021 is a surplus of RUB 1.4 bln with expected TNTR exceeding TNTR predicted by the budget law by 11%. As of 9M 2021, the budget was executed with a surplus of RUB 7.2 bln.
The Region’s budget has moderate operating efficiency — the averaged ratio of the balance of current operations to current revenues is consistently positive and will amount to 6.1% for 2018–2022. The ratio of the averaged modified budget deficit to current revenues for the specified period will be -3.7%. These indicators show that the Region’s current revenues are sufficient to finance current expenditures, but in order to finance capital expenditures, it is partly necessary for the Region to raise additional debt financing or use accumulated liquidity.
The ratio of averaged TNTR to averaged total revenues (excluding subventions) in 2018–2022 will be moderately high and amount to 73.4%.
The averaged share of capital expenditures in 2018–2022 will stand at around 18.3% of total expenditures (excluding subventions). On average, the Region finances around half of its capital expenditures on its own. This means capital expenditures can be viewed as a possible reserve for cutting budget expenses if the revenue side of the budget declines.
Significant volume of accumulated liquidity. The assessment of the liquidity of the Region’s budget stems from its funds held in treasury accounts and deposits alongside an absence of undrawn credit lines from banks with terms exceeding 12 months.
Account balances as of October 1, 2021 covered the Region’s average monthly expenses for the elapsed period of 2021, exceeded half of the Region’s public debt, and also exceeded the size of public debt due by the end of 2021 by several times.
In order to cover any possible cash gaps, the Region has a standing loan agreement with the Federal Treasury Department, but it did not borrow any money under this agreement since the start of 2019
Moderately developed economy focused on hydrocarbon production. The backbone of the Region’s economy is the extraction of hydrocarbons and related sectors. According to ACRA’s estimates, the extraction, processing and sale of hydrocarbons accounted for about 40% of the Region’s tax revenues annually on average from 2016 to 2020. According to the Region, tax revenues from the ten largest taxpayers accounted for 33.6% of its consolidated budget in 2020. Five of the taxpayers are part of the oil and gas sector; they provided 25.3% of tax revenues.
The Region’s GRP structure by type of activity is similar to that of its tax revenues — the largest share of GRP is provided by the mineral extraction sector (41% in 2019). Based on the forecast of the socio-economic development of the Region, structural changes in the GRP in the medium term are unlikely.
The Region’s averaged per capita GRP for 2016–2019 has been consistently around 86% of the national average.
The ratio of averaged wage to regional subsistence minimum in 2017–2020 was 3.3, while the local unemployment slightly exceeded the national average in 2020.
KEY ASSUMPTIONS
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Execution of the Region’s budget in 2021 with a deficit of no more than 9% of TNTR;
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Partial use of free liquidity to finance the budget deficit in the forecast period;
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Adherence to a conservative debt policy that involves resorting to long-term borrowing, if necessary, to finance the budget deficit.
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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Increased diversification of the economy;
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Lack of need to use accumulated funds to finance the budget deficit;
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Higher current account balance.
A negative rating action may be prompted by:
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GRP growth rate falling behind the national average;
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Substantial decline in the budget liquidity accompanied by a significant increase in public debt.
ISSUE RATINGS
Orenburg Region, 35003 (ISIN RU000A0JVM81); maturity date: July 3, 2025, issue volume: RUB 5 bln — A+(RU).
Orenburg Region, 35004 (ISIN RU000A0ZYKH5); maturity date: December 2, 2027, issue volume: RUB 4 bln — A+(RU).
Rationale. In the Agency’s opinion, the bonds issued by the Orenburg Region are senior unsecured debt instruments, and their credit rating is equal to that of the Orenburg Region.
REGULATORY DISCLOSURE
The credit ratings of the Orenburg Region and the bonds of the Orenburg Region (RU000A0JVM81, RU000A0ZYKH5) 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 rating of the Orenburg Region and the credit ratings of the government bonds (RU000A0JVM81, RU000A0ZYKH5) of the Orenburg Region were published by ACRA for the first time on January 31, 2018. The credit rating of the Orenburg Region and its outlook, as well as the credit ratings of the government bonds (RU000A0JVM81, RU000A0ZYKH5) of the Orenburg Region 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 the data provided by the Orenburg 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 Government of the Orenburg 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 Government of the Orenburg Region. No conflicts of interest were discovered in the course of credit rating process.
