The credit rating of the Kemerovo Region – Kuzbass (hereinafter, the Region) is based on the Region’s moderately low debt load combined with moderate risks of refinancing its liabilities. The rating is supported by significant capital expenditures included in the Region's budget and an impressive amount of liquidity available to the regional government. 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.
The Region is part of the Siberian Federal District and is home to 2.6 mln people (1.8% of Russia’s total population). The Region’s GRP amounted to RUB 1.1 tln in 2019, nearly 1.2% of Russia’s total GRP.
KEY ASSESSMENT FACTORS
Moderately low debt load. According to ACRA's estimates, the ratio of the Region's debt to current revenue could reach 42% by the end of 2021 and grow further to 54% by the end of 2022. These indicators correspond to a moderately low level of debt load.
As of December 1, 2021, budget loans (41%) and bank loans (36%) prevailed in the structure of the Region's debt; bonds and other debt obligations made up 11% each, and the rest fell on government guarantees. By the end of 2022, the Region will have to repay 44% of its total debt, including all bank loans. Interest expenses are not burdensome for the Region: the averaged1 interest expenses for 2018–2022 are estimated at about 1% of total budget expenditures (excluding subventions).
In 2021, the Government of the Russian Federation restructured a RUB 6.0 bln budget loan granted to the Region a year earlier to refinance the loan borrowed from the Federal Treasury Department (FTD). In addition, the Region borrowed a RUB 3.6 bln budgetary loan to substitute its commercial debt. These measures help to reduce both the risks of refinancing the Region's debt obligations and debt service costs.
1 Hereinafter, averages are calculated according to the Methodology for Assigning Credit Ratings to Regions and Municipal Entities of the Russian Federation.
High level of budget liquidity. The Region regularly deposits its temporarily free funds with banks. As of December 1, 2021, the amount of such deposits was 3.4 times higher than the Region's average monthly expenditures for the nine months of 2021. Such practice gives the Region additional revenues used to cover a portion of debt service costs.
Regional budget revenues grew in 2021 due to a favorable situation in the global coal and metal market. In the nine months of 2021, total revenues increased by 30% y-o-y, and tax and non-tax revenues (TNTR) grew by 53%. The largest contribution to this growth came from income tax revenues, which more than doubled amid a favorable situation in the world coal and metal market. Regional budget expenditures for the nine months of 2021 decreased by 1% y-o-y, and the interim budget deficit of RUB 21 bln turned into an interim surplus of RUB 15 bln.
The Law on the Regional Budget for 2021 provides for a 20% increase in total revenues, a 42% increase in TNTR, and a 3% increase in expenditures, while budget deficit is expected at about 10% of TNTR. The deficit is planned to be covered primarily through increased debt load. According to ACRA's estimates, by the end of 2021, the actual deficit may turn out to be significantly lower than the planned level.
The averaged share of TNTR in the total revenues of the Region (excluding subventions) in 2018–2022 should amount to 78%. The averaged ratio of current account balance to current revenue (as per ACRA's methodology) for the specified period should equal 3%, and the ratio of averaged modified budget deficit to current revenue should be -11%. These metrics indicate the sufficiency of current revenues to cover current expenditures and the need for more borrowings to finance capital expenditures. Averaged capital expenditures in 2018–2022 should amount to 18% of total budget expenditures (excluding subventions).
High concentration of the economy in the mining sector. The economy of the Region is based on coal mining and related industries. Historically, the largest taxpayers in the Region are coal and metal companies. In 2020, seven out of the ten largest taxpayers in the Region belonged to these industries. The main contributor to tax revenues of the regional budget is the coal mining industry. According to ACRA's estimates, after a decrease down to 21% in 2020, the share of tax revenues from coal mining grew to 28% in 10M2021 due to the improved situation on the global market. According to ACRA's estimates, The Region's tax revenues from the metal industry increased to 12% in the same period. Coke and chemicals manufacturing industry is also notable for its contribution to budget revenues: in 10M2021, its share in the Region's tax revenues amounted to about 5%.
The averaged GRP per capita of the Region in 2016–2019 was 69% of the national average. The ratio of averaged salary to regional subsistence minimum in 2017–2020 exceeded 3.5.
KEY ASSUMPTIONS
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Budget execution in 2021 as stipulated by the regional budget law;
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TNTR declining by no more than 6% in 2021 compared to 2020;
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Budget deficit in 2022 not exceeding 13% of TNTR.
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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Maintaining a high volume of free liquidity;
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Revision of the Region’s debt policy towards a lower share of short-term debt;
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Achieving stable positive values of modified budget deficit and current account balance;
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Closing the gap between the Region's economic metrics and national averages;
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Reaching the ratio of debt to current expenditures sustainably below 30%.
A negative rating action may be prompted by:
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Budget deficit in 2021 exceeding 10% of TNTR;
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Debt load exceeding 55% of current revenues by the end of 2021;
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A significant fall in budget liquidity.
ISSUE RATINGS
Kemerovo Region, 35002 (ISIN RU000A0ZYB40), maturity date: September 26, 2024, issue volume: RUB 9 bln — A-(RU).
Rationale. In the Agency’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 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 Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities. To assign credit rating to the above bond issue, ACRA also applied the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation.
The credit rating of the Kemerovo Region — Kuzbass and the credit rating the bond (ISIN RU000A0ZYB40) issued by the Kemerovo Region — Kuzbass were published by ACRA for the first time 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 (ISIN RU000A0ZYB40) issued by the Kemerovo Region — Kuzbass 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 Kemerovo Region — Kuzbass, 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 Kemerovo Region — Kuzbass 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 Kemerovo Region — Kuzbass. No conflicts of interest were identified in the course of credit rating assignment.
