Determinants of Credit Ratings of Russia’s Regions

Abstract

Introduction. A credit rating reflects the degree of debt sustainability of the region, but the issue of its factors at the regional level has been under-researched. The article is based on the conducted study and reveals the major factors that influenced the assignment of credit ratings by Russian and international rating agencies to the regions of Russia. Materials and Methods. The methodology of both Russian (ACRA and Expert RA) and foreign (Fitch Ratings, S&P Global Ratings, and Moody's Investors Service) rating agencies were analyzed. Factor and correlation analysis was used to group the factors; their quantitative indicators were selected. Ordinal and multinomial logistic regressions (logits) were used to test the explanatory power of the factors. Results. The negative impact on the rating of the factors of debt, deficit, and the size of the public sector, as well as the positive impact of the size and dynamics of the region’s economy has been corroborated. The negative impact of poverty, as well as the positive impact of life expectancy and the size of capital budget expenditures has been highlighted. Differences in using the indicator of the region’s dependence on subsidies have been revealed: it has been regarded as an insignificant factor by international agencies, but as a negative one by Russian agencies. Discussion and Conclusion. The authors have established that Russian agencies give priority to quantitative budget indicators, while international ones give priority to traditional economic indicators. The identified significance of the indicators of life expectancy and poverty has become a particularly valuable result as it indicates a direct dependence of the credit rating on the quality of life in the region. The results obtained make it possible to formulate regional budget policy measures aimed at reducing credit risk, expanding debt financing, and increasing the effectiveness of budget policy. The results of the study will be useful not only in the practice of public administration, but also in further scientific research, as they open the way to the analysis of the interdependence between the credit rating and countercyclical fiscal policy measures, as well as to clarify the role of other factors in creditworthiness, especially those of an institutional nature.

Keywords

• debt sustainability
• methodology of rating agencies
• region’s dependence on subsidies
• factor analysis
• multinomial logistic regression