Regional Public Debt Growth Jeopardises Budget Targets

CEIC Russia Data Talk - August 12, 2015 Since the beginning of 2015, the debt burden of Russian regions has significantly increased. In June 2015 the total regional public debt, including the debt of municipalities whose share is no more than 15% of total regional debt, grew by 15.5% compared to November 2014 and by 20.4% compared to June 2014, to RUB 2.43 trillion. Constantly increasing budget expenditure, especially social spending, was the main reason for the growth of the regional public debt, notably occurring at the end of each year when the largest social benefit payments are made. Month-on-month growth rates for December 2012, 2013 and 2014 were 15.9%, 16.4% and 14.2%, respectively, while monthly growth rates from January to November ranged from -4.5% to 4.5%. The major components of the regional public debt are banking and other budgets loans, while the minor components are regional government (municipal) securities, regional (municipal) guarantees and other regional debt liabilities. Bank loans are the main credit source of regional budget financing comprising 30-40% of total regional public debt since November 2013; bank loans see a sharp increase at the end of each year, similar to the total regional public debt. In December 2014, bank loans in the regional public debt grew by 30.5% over the previous month, and bank loans in municipal public debt by 24% over the same period. In December 2013 and 2012, the growth rates of bank loans compared to the previous month was even more significant: 52.6% and 46.2% respectively for regional debt, and 33.9% and 35.2% for the debt of municipalities. However, the rise in the cost of bank loans due to the increase in the Central Bank key rate reduced demand for bank loans, causing a fall in June 2015 by almost 10% compared to December 2014 in the regional public debt, and by 5.7% in municipal public debt. Budget loans, mainly from the federal budget, are the second credit source of regional and local budget financing. The low interest rates of budget loans and the possibility of their restructuring have made them very attractive for regional government financing. The annual growth of budget loans in the regional public debt in December 2014 was 37.5%, and in June 2015 it reached 50.4% which came close to the level of bank loans in absolute terms: RUB 783.4 billion of budget loans, against RUB 799.7 billion of bank loans. Local governments are limited in the amount they may borrow from regional budgets and instead mainly utilise priority loans from the federal budget. Budget loans in municipal budgets grew by 1.2% in December 2014; this has since accelerated to 14.1% in June 2015. Because of lack of financial resources in Russia presently, the Ministry of Finance is extending new loans in smaller amounts than previously with the budget loan increasing due to the restructuring of previously accumulated debts. The Central and Volga Regions are among the federal districts in the spotlight for regional public debt evaluation as their public debt account for over 50% of total regional public debt and their annual debt growth for the period from November 2014 to June 2015 was fairly stable. The Volga Region Federal District debt increased by 27.2% in June 2015 to RUB 504 billion while the Central Federal District debt rose 16.6% during the same period to RUB 561 billion. Siberian Federal District, the third most important by total debt contribution, on the contrary, decreased its annual debt growth rate from 45.1% to 23.2%, likely from additional revenues from mining extraction due to the increased tax rates since January 2015. According to recently released Ministry of Finance data, in June 2015 six regions decreased their annual debt burden, while four regions more than doubled their annual debt burden. Belgorod Region in Central Federal District made the greatest progress in reducing its public debt burden, with an annual debt decrease of 12.9% in June 2015. Primorsky Territory’s (Far East) debt almost tripled in June 2015 compared to June 2014. During 2014, only seven out of 83 regions managed to lower their public debt. Notably, regions with high revenues, such as Tyumen Region, City of St. Petersburg and City of Moscow, reduced their debt compared to 2013 by 55.6%, 21.6% and 9.7%, respectively. On the other hand, three regions saw their public debt more than double due to increased social obligations. Perm Territory (Ural), Irkutsk Region (Siberia) and Magadan Region (Far East) increased their public debt by 2,185%, 274% and 154% respectively. Constantly growing social expenditures for wage increases in the education, health and cultural sectors financed by regional budgets are the main cause of the debt burden increasing. In addition, borrowings have become more expensive as foreign investors have withdrawn from Russia because of the ongoing sanctions against Russia, along with reduced demand for regional securities and high bank loan interest rates. The debt burden decrease can be carried out via the redistribution of taxes in favour of regional budgets, as well as via a tax collection increase. Otherwise, regional defaults might be a threat and the federal budget will have to increase subsidies, subventions and loans to regional budgets. This would further increase the federal budget deficit, which has already reached a very significant level of RUB 845.7 bn as of May 2015. By Evgeny Shlyakov - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
12th August 2015 Regional Public Debt Growth Jeopardises Budget Targets