The credit rating outlook of the Ivanovo Region (hereinafter referred to as the Region) has been revised on the expected changes in the debt profile caused by the restructuring of budget loans.
The credit rating remains under pressure due to a critical gap between the development indicators of the Region’s economy and the national average figures, low control over the spending side of the budget, and high debt load.
The Region is located in the Central Federal District and borders four other administrative entities of the Russian Federation. About 1% of the Russian population live in the Region. In 2015, the regional GRP amounted to RUB 171 billion (0.3% of the aggregate GRP of the Russian regions). Over a third of the manufacturing sector are textile and clothing industries.
Key rating assessment factors
The critical level of regional economy is determined by the regional industrial profile and the absence of large manufacturers with a high added value. In 2013–2015, the industrial output comprised about one fourth of the Region’s GRP; the remaining share included service and budget sectors. The main segments of regional economy are textile and clothing industries (about 28% of industrial output) (generating no significant budget revenues), power, gas and water production and distribution (about 23%), and food industry (about 14%). The tax base of the Region’s budget is limited by historically low GRP per capita (38% of the national average) and low cash income per capita (72% of the national average). However, there are certain investment projects that may, in mid- and long term, drive the GRP up with a pace outrunning the national average and potentially change the Region’s level of economic development.
Low budget indicators amid low share of capital expenses. The Region’s budget is constrained by economic indicators. Almost one third of budget revenues is generated from grants, most of which are budget equalization grants. In view of the above, the budget self-sustainability is assessed as medium. With a very high level of mandatory expenditures (83% on average in 2014–2017), the share capital expenses is as low as 7% (with a further expected decrease to 5–6% in 2018–2019). ACRA expects that, on the back of planned cost cuts, the operating balance will grow up to 13% of regular revenues in 2018–2019 (against 10% in 2016).
The structure of tax revenues is dominated by personal income taxes, which were comparable to the aggregate of profit tax and property tax in 2014–2017. As the number of employees in the public sector (healthcare, education, government etc.) is comparable with the number of employees in other sectors, personal income tax revenues depend on the level of salaries in budget-funded organizations.
The industry diversification of tax revenues is sufficient. The maximum share of revenues is generated by the beverage sector (12% on average in 2014–2016). However, according to ACRA estimates, almost all such revenues come from a branch of OJSC SAN InBev, which creates certain risks for the regional budget as no other similar large taxpayers operate in the Region (even taking into account the declining output of the factory).
Decrease of the current debt load while retaining high debt amount. Although debt burden is high (debt to operating balance ratio is expected to be at 4.83 by the end of 2017), the Region’s participation in the fiscal loans restructuring program will allow smoothing the debt repayment profile even in the case of a forced repayment of some share of debt following a violation of terms and conditions established by the Ministry of Finance. As a result, the operating balance after interest expenses to current period debt repayment amount ratio will be 0.7x-0.4x in 2018-2019 (as at year-end 2017, it is estimated to equal 0.3x).
Sufficient budget liquidity. Thanks to loans provided by the Federal Treasury Department, the Region has enough liquidity to timely make expenditures including interest payments. However, monthly budget cash balances are lower than monthly expenses, and the Region is in constant need for funding to cover cash gaps. The sources of such funding include short-term treasury loans and commercial bank loans.
Key assumptions
- The Region’s government enters into fiscal loans restructuring agreements;
- Higher budget equalization grants in 2018;
- Lower budget expenses in 2018.
Potential outlook or rating change factors
The Positive outlook assumes that the rating will most likely be changed within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- Region’s compliance with fiscal loans restructuring agreement;
- Provision of additional aid to the Region by a higher-level budget to repay commercial debt;
- A substantial positive economic and tax effects from new investments into the textile industry and other sectors of regional economy;
- Personal income growth rates outpacing the national average;
- Lower mandatory budget expenses, amid growing capital expenses, including those funded from the federal budget;
- Debt burden getting lower;
- Further stabilization of debt repayment schedule.
A negative rating action may be prompted by:
- Return to the practice of annual refinancing of the bulk of debt;
- Annual fiscal loans repayment share exceeding 20% of their total amount.
Issue ratings
None.
Rating history
None.
Regulatory disclosure
The credit rating has been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.
The credit rating of the Ivanovo Region was published on September 1, 2017 for the first time. The affirmation of the credit rating and revision of its outlook were made on November 21, 2017. The credit rating and its outlook are expected to be revised within 182 days (as per the 2017-2018 calendar of planned sovereign rating revisions and publications).
The assigned credit rating is based on the data provided by the Ivanovo Region, information from publicly available sources (the Ministry of Finance, the Federal State Statistics Service, and the Federal Tax Service), as well as ACRA’s own databases. The credit rating is solicited, and the Ivanovo Region participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by the Ivanovo Region in its financial report have been discovered.
ACRA provided no additional services to the Ivanovo Region. No conflicts of interest were discovered in the course of credit rating assignment.
