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IBI-Rating has affirmed the credit rating and the rating of investment attractiveness of Kharkiv city
03.06.2024
National rating agency IBI-Rating informs on affirming of the credit rating of Kharkiv city at uaВВВ- grade with an «evolving» outlook and keeping it on the CreditWatch List. The rating of investment attractiveness has been affirmed at invA grade.
Such rating grades reflect the high investment attractiveness and sufficient capacity of the municipality to pay off its obligations. The «-» mark indicates an intermediate rating category relative to the main category. The «evolving» outlook indicates possible changes in the credit rating during the year. Being on the CreditWatch List is due to the deterioration of the business environment and increased uncertainty about the prospects for economic development amid ongoing military operations in Ukraine due to the aggression of the Russian Federation.
Were taken into account:
1. Structure of the city's economic complex and dynamics of key indicators
Kharkiv city has a powerful industrial complex characterised by a significant share of high-tech and innovative enterprises whose products are sold, including for export. From the very beginning of the full-scale war, Kharkiv has been severely affected by the Russian aggression: the city has been subjected to rocket attacks, which has significantly damaged both industrial and civilian infrastructure.
In 2023, 0.4 thousand legal entities and 15.2 thousand individual entrepreneurs ceased operations. 0.8 thousand legal entities and 0.7 thousand individual entrepreneurs moved their businesses out of Kharkiv and changed their legal addresses. However, despite the military aggression, more than 1,500 new legal entities and about 13,900 new individual entrepreneurs were registered in the city in 2023. 1.1 thousand legal entities and almost 1.0 thousand individual entrepreneurs changed their tax address to Kharkiv city territorial community.
Small businesses have a significant impact on the development of the Kharkiv economy. According to the Main Department of the State Tax Service in Kharkiv region, as of 01 January 2024, the number of individual entrepreneurs in Kharkiv amounted to 118,209, while at the beginning of last year their number was 119,743.
Since the beginning of active hostilities in Kharkiv city, consumer market facilities (trade, restaurant, consumer services, markets and trading platforms) have suffered significant damage and destruction. Nevertheless, a significant number of businesses continue to operate, including a number of restaurant businesses that have turned into volunteer kitchens.
On March 06, 2022, President of Ukraine Volodymyr Zelenskyy signed a decree awarding Kharkiv the title of «Hero City of Ukraine» to recognize the feat, mass heroism and resilience of citizens who defended their city from the armed aggression of the Russian Federation against Ukraine.
2. Efficiency of financial policy and budget indicators
Based on the provisions of regulatory legal acts, in the process of implementing the budget of Kharkiv city territorial community for 2022, it was possible to avoid a critical reduction in the main revenue sources and ensure a balanced budget, optimise the structure of expenditures and their reorientation to support the livelihoods of the population of Kharkiv.
In 2022, the budget of the Kharkiv city territorial community received UAH 15,824.0 million, of which the general fund revenues amounted to UAH 13,216.6 million (83.5%), the special fund - UAH 174.8 million (1.1%), and transfers - UAH 2,432.6 million (15.4%).
In 2023, the budget of Kharkiv city territorial community received UAH 18,170.93 million (+15.39% compared to the previous year), of which 79.75% were own revenues. Compared to 2022, own revenues increased by UAH 1 billion (+8.21%). Fulfilment of the revised budget targets for Kharkiv city territorial community for 2023 in terms of revenues amounted to 83.5%. At the same time, the plan for own revenues was fulfilled by 96.35%, and the plan for transfers by 54.75%.
In 2023, the budget expenditures of the Kharkiv Municipal Territorial Community amounted to UAH 17.34 billion (-19.78% compared to the previous year). The constant shelling of the region and the city of Kharkiv determined the priority financing of expenditures aimed at ensuring the functioning of the city's vital functions and infrastructure repair and restoration works - expenditures on housing and communal services had a significant share in total expenditures (26.63% of expenditures excluding intergovernmental transfers).
Expenditures on economic activity accounted for 31.92% of the total. Also, a significant part of the community budget expenditures was directed to education (24.51% of total expenditures, -8.84% compared to 2022). The plan for expenditures without interbudgetary transfers was fulfilled by 80.37%, with transfers - by 80.22%. The most significant under-execution of the budget plan was observed in the item «Economic activity» (58.92%). The plan for intergovernmental transfers was fulfilled by 71.97%. In 2023, the reverse subsidy from the community budget was not transferred, and only a subvention for the implementation of programmes for the socio-economic development of regions in the amount of UAH 197.62 million from the general fund and UAH 74.77 million from the special fund was transferred to the state budget.
The debt policy of Kharkiv city authorities is determined by the need to attract additional funding for the implementation of projects to restore the city's infrastructure. Borrowings are made by both Kharkiv City Council and municipal enterprises, including those guaranteed by the city authorities. The ratio of direct debt as of 01.01.2024 to the amount of own revenues of the budget of Kharkiv city council for 2023 was 2.49%. As of 01.01.2024, the total amount of balances on guaranteed loans of the city council was UAH 766,957.68 thousand (5.29% of the community's own revenues for 2023).
The amount of direct debt and guaranteed loans (taking into account only the actual balances as of 01.01.2024) amounted to UAH 1,127,842.88 thousand (7.78% of the community's own revenues for 2023). The amount of consolidated debt, excluding overdue accounts payable of utility companies, was UAH 7,392,468.88 thousand at the beginning of 2024 (51.02% of the community's own budget revenues for 2023).
Taking into account the overdue accounts payable of utility companies, the amount of consolidated debt increases to UAH 33.8 billion, which is 2.3 times higher than the amount of own revenues of the community budget in 2023. Thus, the direct debt burden is low, while the consolidated debt burden is significant. In addition, given that a significant amount of debt is denominated in foreign currency, there are currency risks. Risks are partially mitigated by the long-term maturity of the principal under subordinated loan agreements and the absence of peak loads.
Against the backdrop of constant rocket attacks, there were periodic delays in servicing the borrowed funds by utility companies.
3. Natural and geographical potential and availability of material resources for business development
The peculiarity of the economic and geographical position of Kharkiv is its location at the intersection of a number of important transport routes. Today, it is a very large transport hub: railways and motorways lead to Donbas, Crimea, the ports of the Black, Azov and Baltic Seas, and many large industrial centres located outside Ukraine. Kharkiv city has a strong human resource potential - it is a key scientific centre of the country with an extensive system of research institutes and higher education institutions. Kharkiv ranks second in the country after Kyiv in terms of the number of scientific and technical organisations. At the same time, competition for business and the cost of labour resources are lower compared to the capital. The city has an extensive transport, industrial, trade and business infrastructure, which creates favourable conditions for business development. However, as a result of the hostilities, a significant part of the infrastructure in Kharkiv has been damaged. There is also a threat of destruction of material assets and certain difficulties in doing business (compared to cities located far from the military confrontation line).
4. Business environment and investment policy of the local authorities
Local authorities are actively working to support entrepreneurship, create a positive image of the city and implement investment projects aimed at its development.
In order to increase the investment attractiveness of the community, Kharkiv city cooperates with the international rating agencies Moody's Investors Service Inc. and Fitch Ratings Ltd. As of 01.03.2024, Kharkiv has the following credit ratings from international rating agencies:
Such rating grades reflect the high investment attractiveness and sufficient capacity of the municipality to pay off its obligations. The «-» mark indicates an intermediate rating category relative to the main category. The «evolving» outlook indicates possible changes in the credit rating during the year. Being on the CreditWatch List is due to the deterioration of the business environment and increased uncertainty about the prospects for economic development amid ongoing military operations in Ukraine due to the aggression of the Russian Federation.
Were taken into account:
1. Structure of the city's economic complex and dynamics of key indicators
Kharkiv city has a powerful industrial complex characterised by a significant share of high-tech and innovative enterprises whose products are sold, including for export. From the very beginning of the full-scale war, Kharkiv has been severely affected by the Russian aggression: the city has been subjected to rocket attacks, which has significantly damaged both industrial and civilian infrastructure.
In 2023, 0.4 thousand legal entities and 15.2 thousand individual entrepreneurs ceased operations. 0.8 thousand legal entities and 0.7 thousand individual entrepreneurs moved their businesses out of Kharkiv and changed their legal addresses. However, despite the military aggression, more than 1,500 new legal entities and about 13,900 new individual entrepreneurs were registered in the city in 2023. 1.1 thousand legal entities and almost 1.0 thousand individual entrepreneurs changed their tax address to Kharkiv city territorial community.
Small businesses have a significant impact on the development of the Kharkiv economy. According to the Main Department of the State Tax Service in Kharkiv region, as of 01 January 2024, the number of individual entrepreneurs in Kharkiv amounted to 118,209, while at the beginning of last year their number was 119,743.
Since the beginning of active hostilities in Kharkiv city, consumer market facilities (trade, restaurant, consumer services, markets and trading platforms) have suffered significant damage and destruction. Nevertheless, a significant number of businesses continue to operate, including a number of restaurant businesses that have turned into volunteer kitchens.
On March 06, 2022, President of Ukraine Volodymyr Zelenskyy signed a decree awarding Kharkiv the title of «Hero City of Ukraine» to recognize the feat, mass heroism and resilience of citizens who defended their city from the armed aggression of the Russian Federation against Ukraine.
2. Efficiency of financial policy and budget indicators
Based on the provisions of regulatory legal acts, in the process of implementing the budget of Kharkiv city territorial community for 2022, it was possible to avoid a critical reduction in the main revenue sources and ensure a balanced budget, optimise the structure of expenditures and their reorientation to support the livelihoods of the population of Kharkiv.
In 2022, the budget of the Kharkiv city territorial community received UAH 15,824.0 million, of which the general fund revenues amounted to UAH 13,216.6 million (83.5%), the special fund - UAH 174.8 million (1.1%), and transfers - UAH 2,432.6 million (15.4%).
In 2023, the budget of Kharkiv city territorial community received UAH 18,170.93 million (+15.39% compared to the previous year), of which 79.75% were own revenues. Compared to 2022, own revenues increased by UAH 1 billion (+8.21%). Fulfilment of the revised budget targets for Kharkiv city territorial community for 2023 in terms of revenues amounted to 83.5%. At the same time, the plan for own revenues was fulfilled by 96.35%, and the plan for transfers by 54.75%.
In 2023, the budget expenditures of the Kharkiv Municipal Territorial Community amounted to UAH 17.34 billion (-19.78% compared to the previous year). The constant shelling of the region and the city of Kharkiv determined the priority financing of expenditures aimed at ensuring the functioning of the city's vital functions and infrastructure repair and restoration works - expenditures on housing and communal services had a significant share in total expenditures (26.63% of expenditures excluding intergovernmental transfers).
Expenditures on economic activity accounted for 31.92% of the total. Also, a significant part of the community budget expenditures was directed to education (24.51% of total expenditures, -8.84% compared to 2022). The plan for expenditures without interbudgetary transfers was fulfilled by 80.37%, with transfers - by 80.22%. The most significant under-execution of the budget plan was observed in the item «Economic activity» (58.92%). The plan for intergovernmental transfers was fulfilled by 71.97%. In 2023, the reverse subsidy from the community budget was not transferred, and only a subvention for the implementation of programmes for the socio-economic development of regions in the amount of UAH 197.62 million from the general fund and UAH 74.77 million from the special fund was transferred to the state budget.
The debt policy of Kharkiv city authorities is determined by the need to attract additional funding for the implementation of projects to restore the city's infrastructure. Borrowings are made by both Kharkiv City Council and municipal enterprises, including those guaranteed by the city authorities. The ratio of direct debt as of 01.01.2024 to the amount of own revenues of the budget of Kharkiv city council for 2023 was 2.49%. As of 01.01.2024, the total amount of balances on guaranteed loans of the city council was UAH 766,957.68 thousand (5.29% of the community's own revenues for 2023).
The amount of direct debt and guaranteed loans (taking into account only the actual balances as of 01.01.2024) amounted to UAH 1,127,842.88 thousand (7.78% of the community's own revenues for 2023). The amount of consolidated debt, excluding overdue accounts payable of utility companies, was UAH 7,392,468.88 thousand at the beginning of 2024 (51.02% of the community's own budget revenues for 2023).
Taking into account the overdue accounts payable of utility companies, the amount of consolidated debt increases to UAH 33.8 billion, which is 2.3 times higher than the amount of own revenues of the community budget in 2023. Thus, the direct debt burden is low, while the consolidated debt burden is significant. In addition, given that a significant amount of debt is denominated in foreign currency, there are currency risks. Risks are partially mitigated by the long-term maturity of the principal under subordinated loan agreements and the absence of peak loads.
Against the backdrop of constant rocket attacks, there were periodic delays in servicing the borrowed funds by utility companies.
3. Natural and geographical potential and availability of material resources for business development
The peculiarity of the economic and geographical position of Kharkiv is its location at the intersection of a number of important transport routes. Today, it is a very large transport hub: railways and motorways lead to Donbas, Crimea, the ports of the Black, Azov and Baltic Seas, and many large industrial centres located outside Ukraine. Kharkiv city has a strong human resource potential - it is a key scientific centre of the country with an extensive system of research institutes and higher education institutions. Kharkiv ranks second in the country after Kyiv in terms of the number of scientific and technical organisations. At the same time, competition for business and the cost of labour resources are lower compared to the capital. The city has an extensive transport, industrial, trade and business infrastructure, which creates favourable conditions for business development. However, as a result of the hostilities, a significant part of the infrastructure in Kharkiv has been damaged. There is also a threat of destruction of material assets and certain difficulties in doing business (compared to cities located far from the military confrontation line).
4. Business environment and investment policy of the local authorities
Local authorities are actively working to support entrepreneurship, create a positive image of the city and implement investment projects aimed at its development.
In order to increase the investment attractiveness of the community, Kharkiv city cooperates with the international rating agencies Moody's Investors Service Inc. and Fitch Ratings Ltd. As of 01.03.2024, Kharkiv has the following credit ratings from international rating agencies:
- Moody's Investors Service Inc - long-term issuer rating on the international scale in foreign and national currency at the level of ‘Caa3’, outlook ‘stable’, basic credit assessment at the level of ‘caa3’.
- Fitch Ratings Ltd - Long-Term Foreign and Local Currency IDRs of ‘CC’, Long-Term Local Currency IDRs of ‘CCC-’.
On 09.02.2024, Moody's Investors Service changed the credit outlook of Kharkiv city from «negative» to «stable» and affirmed the long-term foreign and local currency IDRs at ‘Caa3’ and the ‘caa3’ basic credit assessment (BCA). Moody's notes that Kharkiv city has been able to adapt to the military conflict and continue to fulfil its administrative responsibilities by adjusting services and minimising pressure on financial performance. Moody's also notes that the city has repaid most of its debts and is able to service the remaining outstanding debt, which remains at a very low level. Having affirmed the Caa3 rating, Moody's Investors Service Inc. left the rating of Kharkiv one notch above the rating of the Ukrainian government.
The city has a programme to support the development of entrepreneurship in Kharkiv for 2018-2027. The Programme for Strengthening the Positive International Image and Development of International Cooperation of Kharkiv for 2021-2025 and the City Programme of Innovative and Investment Activities and Image Projects for 2017-2025 are being implemented. Since September 2016, the information resource «Investor Navigator. Kharkiv» has been launched in three languages to create a positive investment image of the city and attract domestic and foreign investment in its economy and social development. In 2019, Kharkiv opened the Synergy Science Park, whose mission is to develop scientific, technical and innovative activities, and a business incubator to help scientists commercialise their ideas and developments.
The city also has a municipal institution, the Reforms Office, which is engaged in the introduction of new technologies in all spheres of life: building communication between the city authorities and citizens, creating a smart city, introducing smart technologies and e-government. Kharkiv actively supports and develops cluster initiatives - there are currently 8 clusters in the city.
The city is actively working to promote the investment potential of the city. There is experience of successful cooperation with foreign investors on a number of infrastructure projects. However, due to the ongoing active shelling of Kharkiv, significant operational and investment risks remain.
In order to conduct the analytical research, the materials obtained from Kharkiv city have been used, including: indicators of the social and economic development, statistical data, treasury statements, program materials, other necessary internal information, as well as the information from the public sources, which the Rating Agency considers credible.
ІBI-Rating is the largest Ukrainian rating agency. It has been operating since 2005 and has the status of an authorized rating officer from the National Commission for the Securities Market. The Agency provides professional credit rating and counseling services, it has bilateral partnership with the European rating agency BCRA, certified by ESMA.
Municipal department
For more information please contact:
Press service of IBI-Rating
(044) 362-90-84
press(at)ibi.com.ua
The city has a programme to support the development of entrepreneurship in Kharkiv for 2018-2027. The Programme for Strengthening the Positive International Image and Development of International Cooperation of Kharkiv for 2021-2025 and the City Programme of Innovative and Investment Activities and Image Projects for 2017-2025 are being implemented. Since September 2016, the information resource «Investor Navigator. Kharkiv» has been launched in three languages to create a positive investment image of the city and attract domestic and foreign investment in its economy and social development. In 2019, Kharkiv opened the Synergy Science Park, whose mission is to develop scientific, technical and innovative activities, and a business incubator to help scientists commercialise their ideas and developments.
The city also has a municipal institution, the Reforms Office, which is engaged in the introduction of new technologies in all spheres of life: building communication between the city authorities and citizens, creating a smart city, introducing smart technologies and e-government. Kharkiv actively supports and develops cluster initiatives - there are currently 8 clusters in the city.
The city is actively working to promote the investment potential of the city. There is experience of successful cooperation with foreign investors on a number of infrastructure projects. However, due to the ongoing active shelling of Kharkiv, significant operational and investment risks remain.
In order to conduct the analytical research, the materials obtained from Kharkiv city have been used, including: indicators of the social and economic development, statistical data, treasury statements, program materials, other necessary internal information, as well as the information from the public sources, which the Rating Agency considers credible.
ІBI-Rating is the largest Ukrainian rating agency. It has been operating since 2005 and has the status of an authorized rating officer from the National Commission for the Securities Market. The Agency provides professional credit rating and counseling services, it has bilateral partnership with the European rating agency BCRA, certified by ESMA.
Municipal department
For more information please contact:
Press service of IBI-Rating
(044) 362-90-84
press(at)ibi.com.ua