The credit rating of the Kemerovo Region — Kuzbass (hereinafter, the Region) has been upgraded in view of a significant change in the structure and schedule of debt repayments as the Region has received budget loans, in an amount exceeding one third of the current total volume of debt obligations, to substitute its commercial debt. In addition, the rating is positively affected by the volume of liquidity, which has increased due to a significant inflow of income tax revenues in the first seven months of this year. The accumulated liquidity will allow the Region to finance deficits of future periods. The rating is supported by a significant qualitative growth in the gross regional product (GRP) in 2021.
The credit rating is based on the balanced operating indicators of the Region’s budget, low debt load, and a significant amount of capital expenditures. The rating is constrained by the dependence of economic and budgetary indicators on the dominant industry in the Region (coal mining).
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 1.04 tln in 2020, nearly 1.1% of Russia’s total GRP. According to the Region’s calculations, its GRP grew to RUB 1.8 tln in 2021.
key assessment factors
Balanced operating indicators of budget profile. The averaged1 ratio of the current account balance to current revenues will amount to 15% in 2019–2023, which indicates a moderately high level of operational efficiency. In 2021, the volume of the current account balance grew considerably compared to 2020. ACRA assumes this indicator will continue to be positive in 2022.
The averaged value of the share of capital expenditures in total expenditures in 2019–2023 will amount to around 21%, which, according to ACRA’s methodology, corresponds to a high level of flexibility of budget expenditures. More than two-thirds of capital expenditures are financed by the regional budget. Capital expenditures may double this year against the previous year.
The share of tax and non-tax revenues (TNTR) in the Region’s revenues averaged over the specified period (excluding subventions) will be 79%.
The ratio of the modified budget deficit to current revenues averaged for 2019–2023 is expected to be 3%, which indicates that the Region can finance its capital expenditures without using accumulated funds.
The growth of tax revenues in January–August 2022 allowed the Region to accumulate a significant reserve of liquidity. The growth of TNTR may exceed 30% at the end of this year, and, regardless an expected significant increase in the budget expenditures, the Region will end the year with a surplus.
The draft law on the budget for 2023 and the planning period of 2024–2025 assumes a sharp reduction in income tax revenues due to a decrease in prices for thermal coal by 26% in 2023 and by 51–65% in 2024–2025 against the 2022 average, as well as a 50% discount to world prices for coal exported from Russia to Asia-Pacific countries in 2023–2025.
1 Hereinafter, averages are calculated according to the Methodology for Assigning Credit Ratings to Regions and Municipal Entities of the Russian Federation.
Low debt load and low refinancing risks. This year, the Region received a RUB 21.3 bln loan for substitution of market debt and a RUB 1.5 bln loan for financial support of infrastructure projects. As of November 1, 2022, the Region has repaid bank loans, and now its debt consists of budget loans (82%), with the rest falling on bonds and other debt instruments. Following debt refinancing, the debt repayment schedule has become smoother: the Region will have to repay no more than 17% of the debt annually (previously — 37%). This significantly improves the assessment of the Region's debt profile.
As of the end of 2022, the ratio of debt to current revenues is expected by ACRA at about 21%. However, the next year, this ratio will grow to 30%, mostly due to lower current revenues.
Interest expenses are not burdensome for the Region: averaged interest expenses for 2019–2023 will not exceed 1% of total budget expenditures (excluding subventions).
The ratio of debt to the Region’s GRP will not exceed 3% in 2022, which corresponds to a low total debt load according to ACRA’s methodology.
High budget liquidity. Since the start of 2022, the Region’s account balances multiply exceeded monthly budget expenditures. As per the draft budget law, the Region will apply some of its accumulated funds to finance the budget deficit expected next year.
The liquidity ratio of the Region’s budget will exceed 300%, which is high as per the Agency’s methodology.
As of October 1, 2022, the Region did not have any overdue accounts payable. The Region regularly places accumulated funds in bank deposits.
The economy’s high concentration on the mining sector may increase this year. 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. The main contributor to tax revenues of the regional budget is the coal mining industry. According to ACRA’s estimates, the share of tax revenues from coal mining averaged for 2018–2021 was 32%.
The share of industries that make up the public sector of the economy accounted for around 10% in 2018–2021.
The Region’s economy is characterized by comparatively low GRP per capita (averaged GRP per capita in 2017–2020 was 65% of the national average). However, in view of a significant growth of the GRP in 2021, these estimates may be revised. The ratio of the averaged salary to the regional subsistence minimum in 2018–2021 exceeded 400%, which has a positive impact on the assessment of the Region’s economic profile. Unemployment averaged for 2018–2021 was 5.8%.
KEY ASSUMPTIONS
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Execution of the budget in 2022 with a surplus.
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Financing the projected budget deficit using accumulated liquidity.
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Following the policy of long-term borrowings and avoidance of peak repayments.
potential outlook or rating change factors
The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Maintaining a considerable volume of funds in the Region’s accounts;
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Achieving a stable positive value of the modified budget deficit;
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Reaching the ratio of debt to current expenditures consistently below 30%.
A negative rating action may be prompted by:
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Higher dependence of the Region’s economy on mining sector industries;
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Share of short-term debt exceeding 20% of the absolute value of debt;
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Significant decline of available 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 of the Kemerovo Region — Kuzbass and the bond issued by the Kemerovo Region (ISIN RU000A0ZYB40) 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 Financial Instruments on the National Scale for the Russian Federation was also applied to assign the credit rating to the above issue.
The credit rating of the Kemerovo Region — Kuzbass and the credit rating of its government securities (ISIN RU000A0ZYB40) 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 its government securities (ISIN RU000A0ZYB40), 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.
