An increasing number of regional budgets are becoming deficient, and this will force them to go to the public borrowing market
The deterioration of the economic situation in the second half of the year affected even the historically prosperous subjects of the federation. Of the 36 regions that were considered “donors” for many years (they collected more taxes than they received transfers from the cent), 26 closed the third quarter in deficit. In Russia as a whole, the regions transferred 15% less taxes compared to last year.
Net (taking into account received and “sent” funds) receipts of money to local budgets especially decreased in the producing regions, in particular, oil and gas. Deductions from the Khanty-Mansiysk, Yamalo-Nenets Autonomous Districts, Tyumen Oblast, Tatarstan dropped sharply, and the regions closed the third quarter of 2020 with a deficit. At the same time, the amount of money received from the center did not increase so much to compensate for the fall in taxes. The capital regions (Moscow, Moscow region and St. Petersburg) also closed the third quarter in the red.
Budgetary indicators of the “donor” regions for the 3rd quarter of 2020. Source: ACRA
In addition to the negative consequences for the federal budget, the revenue side of which is subject to even greater pressure, the room for maneuver for other regions is also narrowing. The Government’s stake on wealthy subjects that could act as creditors of less financially secured regions cannot work in conditions of deficit budgets. Now the “donor” entities themselves will have to raise money to cover the deficit.
Such trends could further revitalize the regional bond sector in 2021. The number of regions placing bonds on the debt market is likely to increase. In 2020, there were 22 such regions with a spread of national ratings from BBB- (Udmurtia) to AAA (Moscow region). As before, Moscow did not fulfill its plans to enter the bond market, the budget deficit of which for the three quarters of last year amounted to 185 billion rubles.
Compared to 2020, in the coming year, the deterioration of the regional risk profile will become more tangible, and is already being implemented in coupon rates. In 2020, rating agencies took a rather wait-and-see attitude and did not revise their regional ratings, and yields increased insignificantly relative to 2019. In 2021, when the regions have already finalized the results of the past and begin to form budgets for the current calendar year, we can expect other credit ratings and, accordingly, higher rates.
The fundamental assessment of the regional debt, however, does not change: the risk of the regions still makes sense to equate with the risk of the entire federation. In this regard, the increase in profitability will be nominal, but giving already acceptable yields. The issues placed in 2020 offer an average yield to maturity of 5.8-6.3% with a duration of about 3 years. A nominal increase in risk could push yields further upward, offering more substantial premiums to OFZs.
Author Ilya Grigoriev