The credit rating of the Orenburg Region (hereinafter, the Region) has been upgraded in view of the growing operational efficiency of the budget and the sustainably high level of liquidity.

The credit rating is determined by the low debt load with a smooth debt repayment schedule, high operational efficiency of the budget, and flexibility of budget expenditures. The rating is constrained 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. The Region is home to 1.3% of Russia’s population, and it accounts for 1.12% of Russia’s total gross regional product (GRP). The Region’s GRP reached RUB 1.57 tln in 2022 (+11% in nominal terms and +1.3% in real terms compared to 2021). Over 3% of the country’s crude oil, gas and gas condensate is produced in the Region annually.

KEY ASSESSMENT FACTORS

Moderately high budget profile metrics. According to the Region’s statistics for 2020–2023 and the current version of the regional budget law for 2024, the averaged1 ratio of the current account balance to current revenues for 2020–2024 will exceed a 20% threshold. This indicates the sustainability of the growth of operational efficiency and allows, in accordance with ACRA’s methodology, for upgrading the budget’s operational efficiency assessment from moderately high to high. This is because of the sustainably high level of operational efficiency of the budget over the past three years and a comparably high indicator expected this year. The positive current account balance indicates that current revenues are sufficient to cover current expenditures and the most of capital expenditures.

The averaged share of capital expenditures in the total expenditures for 2020–2024 will be about 30%, which, according to ACRA’s methodology, corresponds to high flexibility of budget expenditures. More than half of capital expenditures for 2021–2023 was financed by the Region on its own; last year, this share exceeded 70%.

The 2020–2024 averaged share of tax and non-tax revenues (TNTR) in the Region’s revenues (excluding subventions) will be about 75%.

The ratio of the modified budget deficit (MBD) to current revenues averaged for 2020–2024 is expected at -0.3%. The MBD is expected to be negative in 2024 due to the projected decline in revenues and increase in budget expenditures. The negative MBD indicates the need to use additional sources to finance a portion of capital expenditures.

The Region’s revenues increased by 4% in 2023 versus 2022. The Region’s TNTR grew by 14% due to an increase in personal income tax revenues and corporate income tax revenues (consistently maximum share of TNTR) by 15% and 26%, respectively, as well as significant income from depositing budget funds (3% of TNTR). Last year, the volume of transfers was reduced by 18% compared to 2022. Regional budget expenditures increased by 6% (including a 13% growth of capital expenditures) in 2023, while the budget surplus amounted to 1% of TNTR, which allowed the Region to retain its previously accumulated liquidity.

According to the current version of the Region’s budget law, TNTR may decrease this year by 2% and the volume of transfers may shrink by 5% vs. 2023. Corporate income tax revenues are expected to decrease by 6%, while personal income tax revenues should grow by 6%. The combination of these factors may reduce budget revenues by 3% compared to last year. The expenditure part of the budget will increase by 5% by the end of 2024, while the volume of capital expenditures is to decrease by 4% and current expenditures are planned to grow by 9%. In this case, the regional budget will be executed with a deficit of 9.6% of TNTR.

The budget profile of the Region is assessed by ACRA as moderately strong. There is no information on any breaches of budget legislation over the past five years; the law on the Region’s budget stipulates additional deductions from personal income tax to the budgets of municipalities. The budget process is dominated by conservative expectations. Deviations of actual revenues from the projected figures included in the first version of the budget are observed mainly for income tax due to the volatile external environment. Such deviations occur for reasons beyond the control of the Region. Revenues lost by the budget due to tax benefits do not exceed 2% of TNTR.


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. The Region’s debt grew by 26% in 2023 and amounted to RUB 23 bln, of which 11% were bonds and 89% were budget loans. Last year, the Region borrowed loans to implement infrastructure projects, a special treasury loan, as well as a loan to replenish the balance of funds in the Region’s single budget account for advanced financing of expenditure obligations. The share of this loan in the total amount due on budget loans as of January 1, 2024 exceeded 20%, and it is expected to be repaid by the end of April this year (at the expense of the federal budget, as ACRA believes).

As of January 1, 2024, the Region was to repay 26% of the debt this year (including the loan for advanced financing of expenditure obligations), and 14% next year.

According to the current version of the Region’s budget law, the Region is to reduce the volume of its debt by 12% in 2024.

By the end of 2023, the Region’s ratio of debt to current revenues equaled 17%, and by the end of this year, it may amount to 16%, which indicates a low debt load.

The ratio of averaged interest expenditures to total budget expenditures (excluding subventions) for 2020–2024 will be about 1%. The ratio of debt to GRP will not exceed 2% in 2024.

The debt profile of the Region is assessed by ACRA as strong, given the insignificant debt burden of municipalities and the Region’s balanced debt policy based on the use of long-term debt instruments. Debt obligations of public sector enterprises are insignificant, and the weighted average repayment period of the Region’s debt exceeds three and a half years.

Significant volume of accumulated liquidity. In 2023, the volume of accumulated liquidity increased by 28% and as of January 1, 2024 exceeded the amount of debt on the same date last year by 15% (and more than doubled the average monthly expenses of the Region for 2023). In the current version of the Region’s budget law for this year, no significant spending of accumulated funds is planned, therefore, the liquidity ratio may exceed 140% by the end of 2024.

The qualitative assessment of the Region’s budget liquidity is moderately high. According to the Region, as of January 1, 2024, there were no overdue accounts payable, and there was no need to attract short-term loans to finance cash gaps. The debt refinancing risks are insignificant.

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 averaged to about 40% of the Region’s annual tax revenues from 2020 to 2023. The main purchasers of these products are CIS countries.

The Region’s GRP profile by type of business is similar to that of its tax revenues — the largest share of GRP is ensured by the mineral extraction sector (43% in 2022). According to the forecast of the socioeconomic development of the Region, structural changes in the GRP are unlikely in the medium term.

The Region’s per capita GRP averaged for 2019–2022 is around 89% of the national average. ACRA does not expect this indicator to decline below 80%.

The ratio of averaged wage to regional subsistence minimum was 3.7 in 2020–2023, while the averaged local unemployment rate was 3.6%.

KEY ASSUMPTIONS

  • Budget execution in line with the current version of the Region’s budget law.

  • Adherence to a conservative debt policy that involves resorting to long-term borrowing, if necessary, to finance budget deficits.

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:

  • The 2024 budget deficit lower than projected by ACRA;

  • Sustainable growth of the share of internal revenues (TNTR) in the budget revenue structure;

  • Higher diversification of the regional economy.

A negative rating action may be prompted by:

  • The Region’s need to provide extraordinary support to public sector companies and financial institutions;

  • The budget’s operational efficiency sustainably below 20%;

  • Growth of the ratio of the Region’s debt to current revenues above 30%.

ISSUE RATINGS

Orenburg Region, 35003 (ISIN RU000A0JVM81); maturity date: July 3, 2025, issue volume: RUB 5 bln — AA-(RU).

Orenburg Region, 35004 (ISIN RU000A0ZYKH5); maturity date: December 2, 2027, issue volume: RUB 4 bln — AA-(RU).

Rationale. In the Agency’s opinion, the bond issues of the Orenburg Region are senior unsecured debt instruments, and their credit ratings are equal to that of the Orenburg Region.

REGULATORY DISCLOSURE

The credit ratings of the Orenburg Region and the bond issues 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 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 securities (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 securities (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 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 were, 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 assignment.

We protect the personal data of users and process cookies only to personalize services. You can prevent the processing of cookies in your browser settings. Please read the terms of use of cookies on this website by clicking on more information.