The outlook on the credit rating of the Krasnodar Krai (hereinafter, the Region) has been changed to Positive in view of the Agency’s expectations that in the forecast period the Region’s debt load will stabilize at a low level and the share of capital expenditures that grew in 2022–2023 will remain high.
The credit rating is based on the Region’s moderately low debt load, moderately high operational efficiency of the budget, considerable diversification of tax revenues, and a sufficient volume of funds in the Region’s accounts. The rating is constrained by the medium values of some socioeconomic development indicators and the budget’s growing need to use accumulated liquidity to finance capital expenditures.
The Region is part of the Southern Federal District and has a population of around 5.8 mln (4% of Russia’s population). The Region’s gross regional product (GRP) was RUB 4.3 tln (around 3% of the aggregate GRP of Russia’s regions) in 2022, which is 31% / 8% higher in nominal / real terms than in the previous year. The Region is a consistent leader in terms of agricultural production in Russia. It is also a major resort destination for Russians and an important transportation hub.
key assessment factors
Moderately high budget profile indicators and a growing need to use accumulated funds. The averaged1 ratio of the current account balance to current revenues for 2020–2024 will amount to 16%. According to the current version of the budget law and ACRA’s calculations, the current account balance will be positive this year, which indicates that current revenues are sufficient to cover current expenditures, but there will be a need to resort to borrowed funds or utilize accumulated liquidity to fund a portion of capital expenditures.
The share of capital expenditures in total expenditures averaged for 2020–2024 may amount to around 23%. Flexibility of budget expenditures is assessed as high because over the past four years, capital expenditures were about 70% independently financed by the Region. The share of tax and non-tax revenues (TNTR) averaged for the abovementioned period in the Region’s revenues (excluding subventions) will amount to 79%.
The ratio of the modified budget deficit (MBD) to current revenues averaged for 2020–2024 will amount to -1%, while the MBD is expected to be negative in 2024, as a year earlier, due to the expected growth of capital expenditures. The Region will have to use some of its accumulated funds held in accounts and raise financing, which according to the latest version of the budget law, will mainly consist of budget loans.
This year, the Region expects budget revenues to decline by 8% after their substantial growth in 2023 (+20%) on the back of an unprecedented growth of corporate income tax revenues (+57%). This decline is expected due to a 7% decrease in corporate income tax revenues and a 40% decrease in transfers. The Region’s budget expenditures are planned to increase by 6% year-on-year, while current expenditures may fall by 10% and capital expenditures may grow by over 50%. In this case, the deficit may reach a record high of 18% of TNTR. The Region intends to finance the expected deficit using accumulated liquidity as well as borrowings, including budget loans to finance infrastructure projects.
The budget profile of the Region is viewed by the Agency as moderately strong. There is no information on any breach of budget laws over the past five years; the Region’s budget law establishes additional standards for personal income tax deductions. The budget process demonstrates a moderate planning accuracy and the predominance of conservative expectations. Deviations of actual revenues from the forecast figures stipulated in the initial version of the budget are mostly observed in transfers and corporate income tax revenues due to the volatility of the external environment. Such deviations occur for reasons beyond the control of the Region.
1 Hereinafter, averages are calculated according to the Methodology for Assigning Credit Ratings to Regions and Municipal Entities of the Russian Federation.
Moderately low debt load. In 2023, the Region’s debt increased by 5% and stood at RUB 117.6 bln as of January 1, 2024. In 2023, the Region partially redeemed its bond issues and borrowed budget loans, including an infrastructure budget loan, loan to replenish the balance of funds in the single budget account for the purpose of advance financing, and special treasury loan. As of January 1, 2024, the Region’s public debt was made up of budget loans (84%), and bonds accounted for the rest.
As of the start of this year, the Region had to repay 13% of its debt and 15% in 2025.
If the 2024 budget is executed as planned by the current version of the budget law, ACRA expects the Region’s debt load to remain below 30% of current revenues.
The ratio of debt to GRP as of the end of this year will be around 3%, while the ratio of interest expenditures to total budget expenditures averaged for 2020–2024 (excluding subventions) will be 1%.
The qualitative assessment of the Region’s debt load is determined by the Agency at the highest level given the low debt load of municipalities and the debt structure diversified by instrument; the weighted average debt repayment period exceeded three and a half years at the beginning of this year; the credit history is positive. The current account balance was positive annually.
Sufficient budget liquidity. The Region meets its expenditure obligations on time and receives income from temporarily free funds — interest income amounted to about 3% of TNTR in 2023. Last year, the volume of budget funds held in bank accounts declined by about 40% and as of January 1, 2024, it was 11% higher than average monthly expenses in 2023 and covered 40% of the Region’s public debt as of the same date.
The budget’s liquidity ratio (excluding funds of autonomous and budgetary organizations) for 2024 will be around 101%.
The Region’s liquidity profile is viewed by ACRA as strong. There is no need to attract short-term budget loans from the Federal Treasury Department to cover cash gaps; according to the Region, bank loans have not been attracted over the past 24 months as they were unnecessary. There were no delinquencies on the Region’s debt obligations, including loans, government bonds, and guarantees. Refinancing risks are low due to a smooth debt repayment schedule.
Diversified economy with development indicators close to the national averages. The main industries that generate the major share of the Region’s GRP include transport and storage (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.
The largest share of tax revenues in the regional budget is generated by the wholesale and transport sectors. According to ACRA’s estimates, the averaged share of the wholesale sector, except the motor vehicle and motorcycle wholesale segment, for 2020–2023 amounted to about 13.0% of the regional tax revenues, and that of the transportation sector, except pipeline, amounted to 12.6%.
GRP per capita remains below the national average mainly due to the Region’s large population. The ratio of the Region’s per capita GRP to the national average per capita GRP was 74% averaged for 2019–2022. The ratio of the averaged monthly salary to the regional subsistence minimum for 2019–2022 exceeded 3.3. The averaged unemployment rate for 2019–2022, according to ACRA’s estimates, was 4.28%, and in 2023, according to the Region’s estimates, the unemployment decreased to 1.8%.
key assumptions
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Budget execution as stipulated by the current version of the budget law.
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Attracting infrastructure budget loans in the current year to finance part of the capital expenditures of the forecast period.
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Using free liquidity in the Region’s accounts to finance this year’s expected deficit.
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Maintaining a conservative debt policy.
potential outlook or rating change factors
The Positive outlook assumes that the rating will highly likely be upgraded within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Debt to current revenues ratio consistently below 30%;
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Sustainably high capital expenditures;
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Reduced need of the budget to use accumulated funds.
A negative rating action may be prompted by:
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Growth of the Region’s debt load coupled with significant growth in the share of short-term debt;
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Increased need to use accumulated liquidity to finance capital expenditures;
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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 bond issues of 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 Financial Instruments under the National Scale for the Russian Federation was also applied to assign credit ratings to the above issues.
The credit ratings of the Krasnodar Krai and 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 of the Krasnodar Krai (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 were, 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.
