The credit rating has been upgraded for the Kemerovo Region (the Region) on the significantly improved debt load (in 1H2018, the volume of commercial debt declined by 3.2 times from RUB 30.475 bln to RUB 9.5 bln) and the substantial financial reserves that 1.95 times exceeded the total commercial debt as of August 1, 2018.
The Kemerovo Region is a part of the Siberian Federal District, bordering six other administrative entities of the Russian Federation. The Region’s population is 2.7 million people, two third of which reside within the Kemerovo and Novokuznetsk agglomerations.
Key rating assessment factors
For eight consecutive quarters, the regional budget has been executed with a surplus. In 1H2018, the regional budget surplus amounted to RUB 15.1 billion, or 23.9% of tax and non-tax revenues (TNTR), while in 1H2017, the budget surplus equaled to RUB 11.26 billion, or 20.7% of the TNTR.
The half-year budget surplus has been driven by the persistently favorable prices in the coal market and the budget expenditures growing moderately. As compared to 1H2017, income tax revenues (49.7% of the TNTR) grew by 24.2%, property tax revenues (9.8% of the TNTR) grew by 32.3%, mineral extraction tax (coal) revenues (4.7% of the TNTR) grew by 13.9%. At the same time, the regional budget expenditures went up by 11.4% only.
The proportion of mandatory expenditures (in terms of the ACRA methodology) in the budget is high, and the share of capital expenditures (development budget) will not exceed 9% of the total budget expenditures in 2018.
According to ACRA estimates, the regional budget surplus may exceed 10% of the TNTR in 2018. The Agency expects that the medium term budget revenues driven by favorable prices in the coal market will be spent to develop the regional infrastructure (including social infrastructure), which will result in a significant increase in the regional development budget.
A significant decrease in the volume of commercial debt and debt service costs. As of August 1, 2018, the Region's sovereign debt included: 1) bonds (27.1% of all debt obligations, or RUB 9.5 billion), most of which (95%) are due not earlier than September 2021; 2) budget loan (50.9% of all debt obligations, or RUB 17.819 billion) repayable in 2018–2034; 3) other debt obligations (22.0% of all debt obligations, or RUB 7.698 billion, interest rate of 1%) repayable by January 1, 2035.
The budget surplus was applied to repay commercial debt: the volume of bank loans in the Region's debt decreased from RUB 20.975 billion as of January 1, 2018 to zero as of May 1, 2018. In general, the commercial debt of the Region declined by 3.2 times over the period.
As of August 1, 2018, the regional public debt included no debt instruments, early repayment of which by the budgetary funds would be reasonable in the current economic conditions.
According to ACRA estimates, the significant reduction in the commercial debt will allow the regional budget to save more than RUB 1.3 billion on debt service costs in 2018.
As of August 1, 2018, the volume of financial reserves in the regional budget was 1.95 times higher than the aggregate commercial debt of the Region. Income earned in 1H2018 from the placement of budget funds on deposits made it possible to compensate almost 36.5% of debt service costs for the period.
The regional economy's metrics per capita continue to lag behind the average country levels. The regional economy's backbone is the mining sector, which gave 29.7% of the gross regional product (GRP) in 2016. The share of manufacturing industries (metals industry, chemical industry and oil refining) in the Region's GRP is significant. Per capita income and GRP per capita of the Region lag behind the national averages by 29% and 30%, respectively.
Key assumptions
- World coal prices will remain favorable;
- The budget liquidity will be maintained high;
- The 2018 budget will be executed with a surplus or the budget deficit will not exceed 0.5% of tax and non-tax revenues.
Potential outlook or rating change factors
The Stable outlook assumes that the credit rating will most likely remain unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- The 2018 budget surplus exceeding 10% of tax and non-tax revenues;
- A higher share of capital expenditures in the budget.
A negative rating action may be prompted by:
- A substantial decline of the income tax base in the mining sector;
- A substantial growth of mandatory budget expenditures not supported by tax and non-tax budget revenues.
Issue ratings
Kemerovo Region, 34001 (ISIN RU000A0JUAZ0), maturity date: November 28, 2018, issue volume: RUB 1 billion — A-(RU);
Kemerovo Region, 35002 (ISIN RU000A0ZYB40), maturity date: September 26, 2024, issue volume: RUB 9 billion — A-(RU).
Rationale. ACRA is of the opinion that the above bonds issued by the Kemerovo Region are senior unsecured debt instruments, which credit ratings are equal to that of the Kemerovo Region.
Regulatory disclosure
The credit ratings have been assigned to the Kemerovo Region and bonds (ISIN RU000A0JUAZ0, ISIN RU000A0ZYB40) issued by the Kemerovo Region 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 Analytical Credit Rating Agency within the Scope of Its Rating Activities. In the course of assigning a credit rating to the bond issues above, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation has also been used.
The credit rating assigned to the Kemerovo Region and the credit ratings assigned to the government bonds (ISIN RU000A0JUAZ0, ISIN RU000A0ZYB40) issued by the Kemerovo Region were first published by ACRA on August 29, 2017 and October 2, 2017, respectively.
The credit rating of the Kemerovo Region and its outlook, as well as the credit ratings assigned to the government bonds (ISIN RU000A0JUAZ0, ISIN RU000A0ZYB40) issued by the Kemerovo Region are expected to be revised within 182 days following the rating action date (August 24, 2018) as per the 2018 Calendar of planned sovereign credit rating revisions and publications.
The credit ratings were assigned based on the data provided by the Kemerovo 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 ratings are solicited, and the Kemerovo Region participated in their assignment.
No material discrepancies between the provided data and the data officially disclosed by the Kemerovo Region in its financial reports have been discovered.
ACRA provided no additional services to the Kemerovo Region Administration. No conflicts of interest were discovered in the course of credit rating assignment.
