А. А. Mikhaylova, Е. N. Timushev. Determinants of Credit Ratings of Russia’s Regions

UDК 336.722.117.7(470+571)

DOI: https://doi.org/10.15507/2413-1407.115.029.202102.355-379

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

The authors declare that there is no conflict of interest.

Funding. The article was done as part of the implementation of the government assignment to RANEPA for 2021.

For citation: Mikhaylova А.А., Timushev Е.N. Determinants of Credit Ratings of Russia’s Regions. Regionology = Russian Journal of Regional Studies. 2021; 29(2):355-379. DOI: https://doi.org/10.15507/2413-1407.115.029.202102.355-379

REFERENCES

1. Bloch D., Fournier J.-M. The Deterioration of the Public Spending Mix during the Global Financial Crisis. OECD Economics Department Working Papers. 2018; (1465). (In Eng.) DOI: https://doi.org/10.1787/2f6d2e8f-en

2. Liu L., Tan K.S. Subnational Credit Ratings: A Comparative Review. World Bank Policy Research Working Papers. 2009; (5013). (In Eng.) DOI: https://doi.org/10.1596/1813-9450-5013

3. Tennant D., Tracey M. Sovereign Debt and Credit Rating Bias. Palgrave Macmillan US, 2016. Available at: https://www.researchgate.net/publication/286456424_Sovereign_Debt_and_Credit_Rating_Bias (accessed 02.08.2020). (In Eng.)

4. Tennant D.F., Tracey M.R., King D.W. Sovereign Credit Rating: Evidence of Bias against Poor Countries. The North American Journal of Economics and Finance. 2020; (51). (In Eng.) DOI: https://doi.org/10.1016/j.najef.2018.11.006

5. Barta Z., Makszin K. The Politics of Creditworthiness: Political and Policy Commentary in Sovereign Credit Rating Reports. Journal of Public Policy. 2020. (In Eng.) DOI: https://doi.org/10.1017/S0143814X20000033

6. Cornaggia J., Cornaggia K.J., Israelsen R.D. Credit Ratings and the Cost of Municipal Financing. The Review of Financial Studies. 2018; 31(6):2038-2079. (In Eng.) DOI: https://doi.org/10.1093/rfs/hhx094

7. Pretorius M., Botha I. A Panel Ordered Response Model for Sovereign Credit Ratings in Africa. African Finance Journal. 2016; 18(1):20-33. Available at: https://ideas.repec.org/a/afj/journl/v18y2016i1p20-33.html (accessed 02.08.2020). (In Eng.)

8. Pretorius M., Botha I. The Determinants of Sovereign Credit Ratings in Africa: A Regional Perspective. Advances in Applied Economic Research. 2017. (In Eng.) DOI: https://doi.org/10.1007/978-3-319-48454-9_36.

9. Parlour C.A., Rajan U. Contracting on Credit Ratings: Adding Value to Public Information. The Review of Financial Studies. 2020; 33(4):1412-1444. (In Eng.) DOI: https://doi.org/10.1093/rfs/hhz083

10. Kruck A. Resilient Blunderers: Credit Rating Fiascos and Rating Agencies’ Institutionalized Status as Private Authorities. Journal of European Public Policy. 2016; 23(5):753-770. (In Eng.) DOI: https://doi.org/10.1080/13501763.2015.1127274

11. Balajee A., Tomar S., Udupa G. COVID-19, Fiscal Stimulus, and Credit Ratings. SSRN Electronic Journal. 2020. (In Eng.) DOI: https://doi.org/10.2139/ssrn.3577115

12. Volkova О., Lvova I. How Russian Banks’ Financial Performance Affects Their International Ratings. Ehkonomicheskaya Politika = Economic Policy. 2016; 11(1):177-195. Available at: http://ecpolicy.ru/pdf/2016-1/volkova.pdf (accessed 02.08.2020). (In Rus., abstract in Eng.)

13. Choy S.Y., Chit M.M., Teo W.L. Sovereign Credit Ratings: Discovering Unorthodox Factors and Variables. Global Finance Journal. 2021; 48. (In Eng.) DOI: https://doi.org/10.1016/j.gfj.2020.100548

14. Liu G., Sun R. Economic Openness and Subnational Borrowing. Public Budgeting & Finance. 2016; 36(2):45-69. (In Eng.) DOI: https://doi.org/10.1111/pbaf.12088

15. Fourie E., Verster T., Van Vuuren G.W. A Proposed Quantitative Credit-Rating Methodology for South African Provincial Departments. South African Journal of Economic and Management Sciences. 2016; 19(2):192-214. (In Eng.) DOI: https://doi.org/10.4102/sajems.v19i2.1260

16. Hanniman K. Are Transfer-Dependent Governments More Creditworthy? Reassessing the Fiscal Federal Foundations of Subnational Default Risk. British Journal of Political Science. 2020; 50(4):1381-1403. (In Eng.) DOI: https://doi.org/10.1017/S000712341800042X

17. Cantor R., Packer F. Determinants and Impact of Sovereign Credit Ratings. FRBNY Economic Policy Review. 1996; 2(2):37-54. Available at: https://faculty.nps.edu/relooney/3040_2.pdf (accessed 02.08.2020). (In Eng.)

18. Afonso A., Gomes P., Rother P. Short- and Long-Run Determinants of Sovereign Debt Credit Ratings. International Journal of Finance and Economics. 2011; 16(1):1-15. (In Eng.) DOI: https://doi.org/10.1002/ijfe.416

19. Chee S.W., Fah C.F., Nassir A.M. Macroeconomics Determinants of Sovereign Credit Ratings. International Business Research. 2015; 8(2):118-125. (In Eng.) DOI: https://doi.org/10.5539/ibr.v8n2p42

20. Amstad M., Packer F., Shek J. Does Sovereign Risk in Local and Foreign Currency Differ? Journal of International Money and Finance. 2020; 101. (In Eng.) DOI: https://doi.org/10.1016/j.jimonfin.2019.102099

21. Cuadros-Solas P.J., Salvador Muñoz C. Potential Spillovers from the Banking Sector to Sovereign Credit Ratings. Applied Economics Letters. 2020. (In Eng.) DOI: https://doi.org/10.1080/13504851.2020.1796910

22. Stawasz-Grabowska E. Sovereign Credit Rating Determinants of the EU Countries: The Role of the Euro Area Crisis and Its Legacy. Entrepreneurial Business and Economics Review. 2020; 8(2):47-69. (In Eng.) DOI: https://doi.org/10.15678/EBER.2020.080203

23. Poghosyan T. Long-Run and Short-Run Determinants of Sovereign Bond Yields in Advanced Economies. IMF Working Papers. 2012; (271). (In Eng.) DOI: https://doi.org/10.5089/9781475529142.001

24. Botha I., Pretorius M. The Geographical and Income Differences in the Determinants of African Sovereign Credit Ratings. African Journal of Economic and Management Studies. 2020; 11(4):609-624. (In Eng.) DOI: https://doi.org/10.1108/AJEMS-08-2018-0228

25. De Moor L., Luitel P., Sercu P., Vanpee R. Subjectivity in Sovereign Credit Ratings. Journal of Banking and Finance. 2018; 88:366-392. (In Eng.) DOI: https://doi.org/10.1016/j.jbankfin.2017.12.014

Submitted 30.11.2020; approved after reviewing 21.12.2020; accepted for publication 11.01.2021.

About the authors:

Anna A. Mikhaylova, Senior Researcher, Institute for Applied Economic Research, Russian Presidential Academy of National Economy and Public Administration (Bldg 1, 82 Vernadskogo Ave., Moscow 119571, Russian Federation), Cand. Sci. (Economics), Associate Professor, ORCID: https://orcid.org/0000-0003-0831-2554, Researcher ID: http://www.researcherid.com/rid/AAG-1958-2019, Scopus ID: 57202034126, aam@irof.ru

Evgeny N. Timushev, Junior Researcher, Institute of Socio-Economic & Energy Problems, Komi Science Centre of the Ural Branch of the Russian Academy of Sciences (26 Kommunisticheskaya St., Syktyvkar 167982, Russian Federation), ORCID: https://orcid.org/0000-0002-5220-3841, Researcher ID: http://www.researcherid.com/rid/U-3491-2018, Scopus ID: 57201315444, evgeny_timushev@mail.ru

Contribution of the authors:

A. A. Mikhaylova – problem statement, development of the concept and program of the research; academic supervision; structuring and analysis of the results; critical analysis of primary materials; scientific revision of the text.

E. N. Timushev – formulation of the basic concept of the study; analysis of the modern literature; data collection; evaluation of the results; drawing conclusions; preparation of the initial version of the text.

The authors have read and approved the final version of the manuscript.
To download article