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IBI-Rating has affirmed the credit rating and the rating of investment attractiveness of Kharkiv city
24.10.2024
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. Trade, restaurant and consumer services businesses have suffered significant damage and destruction. Nevertheless, a significant number of businesses continue to operate.
In the first half of 2024, 482 legal entities and 450 individual entrepreneurs moved their businesses out of Kharkiv and changed their tax addresses. At the same time, 541 legal entities and 456 individual entrepreneurs changed their tax addresses to the Kharkiv city territorial community during the same period. Between January and June 2024, 6,185 individual entrepreneurs expressed a desire to start their own business and officially registered their business.
According to the Main Department of the State Tax Service in Kharkiv Region, as of July 01, 2024, 79.9 thousand legal entities and 119.0 thousand individual entrepreneurs were registered in Kharkiv (as of January 01, 2024, 79.2 thousand legal entities and 118.2 thousand individual entrepreneurs). In the first half of 2024, 32 new stationary restaurant businesses with 1,164 seats were opened in Kharkiv. Kharkiv retail chains are developing, with the total number of enterprises amounting to more than 400 units (as of 01.07.2023 - 324).
The retail turnover of enterprises (legal entities) in Kharkiv, the main economic activity of the city. Kharkiv, whose main economic activity is retail trade, amounted to UAH 27.4 billion in the first half of 2024. The growth of retail turnover compared to the same period in 2023 (in actual prices) amounted to 120.2%.
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
In the first half of 2024, the budget of the Kharkiv city territorial community received revenues in the amount of UAH 10,057.53 million. Of this amount, UAH 6,834.77 million is own revenues (67.86% of the total). Compared to the same period in 2023, the amount of total revenues increased by 18.09% (+UAH 1540.83 million), while the amount of own revenues decreased by 6.73% (-UAH 492.33 million).
The main share of the city's own revenues is formed by tax revenues. Their volume in the first half of 2024 amounted to UAH 6.53 billion (95.67% of own revenues and 64.92% of all community budget revenues in the first half of 2024). The most significant item of tax revenues is the personal income tax - according to the results of the first half of 2024, its share is 56.35% of tax revenues.
The budget expenditures of the Kharkiv City Territorial Community in the first half of 2024 amounted to UAH 7.7 billion (+14.93% year-on-year). The constant shelling of the region and the city of Kharkiv determined the priority financing of expenditures aimed at ensuring the city's vital functions and carrying out repair and restoration works on infrastructure facilities. Expenditures on housing and communal services accounted for a significant share of total expenditures (22.53% of expenditures, excluding intergovernmental transfers). Expenditures on economic activity amounted to 28.08% of the total. Also, a significant part of the community budget expenditures was directed to education (31.7% of total expenditures, +6.29% compared to the first half of 2023).
The debt policy of the Kharkiv city authorities is determined by the need to attract additional funding for the implementation of projects to restore urban infrastructure. Borrowings are made by both the Kharkiv City Council and municipal enterprises, including under the guarantees of the city authorities. The ratio of direct debt as of July 01, 2024 to the amount of own revenues of the budget of the Kharkiv City Council for 2023 was 2.52%.
As of 01.07.2024, the total amount of balances on guaranteed loans of the city council amounted to UAH 698,358.76 thousand (4.88% of the planned own revenues of the community for 2024). The amount of direct debt and guaranteed loans (taking into account only the actual balances as of 01.07.2024) amounted to UAH 1,659.24 million (11.58% of the planned own revenues of the community budget for 2024). The amount of consolidated debt, excluding overdue accounts payable of utility companies, as of July 01, 2024 amounted to UAH 8,161.08 million (56.97% of the planned own revenues of the community budget for 2024).
Taking into account the overdue accounts payable of utility companies, the amount of consolidated debt increases to UAH 39.16 billion, which is 2.7 times higher than the amount of planned own revenues of the community budget for 2024. Thus, the direct debt burden is low, while the consolidated debt burden is significant. In addition, given that a significant part of the debt is denominated in foreign currency, there are currency risks. Risks are partially mitigated by the long maturity of the principal under subordinated loan agreements and the absence of peak loads. Against the background of constant rocket attacks, there were periodic delays in servicing borrowed funds by utility companies.
3. Natural and geographical potential and availability of material resources for business development
The specific economic and geographical position of Kharkiv is its location at the intersection of a number of important transportation routes. Today, it is a very large transportation hub: railways and highways lead to Donbas, Crimea, the ports of the Black, Azov and Baltic Seas, and many large industrial centers located outside Ukraine.
Kharkiv has a strong human resource potential - it is a key scientific center 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 organizations. At the same time, competition for business and the cost of labor resources are lower compared to the capital.
The city has an extensive transport, industrial, trade and business infrastructure, which creates favorable 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 tangible 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
The 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 cooperates with the international rating agencies Moody's Investors Service Inc. and Fitch Ratings Ltd.
As of 19.10.2024, 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. Trade, restaurant and consumer services businesses have suffered significant damage and destruction. Nevertheless, a significant number of businesses continue to operate.
In the first half of 2024, 482 legal entities and 450 individual entrepreneurs moved their businesses out of Kharkiv and changed their tax addresses. At the same time, 541 legal entities and 456 individual entrepreneurs changed their tax addresses to the Kharkiv city territorial community during the same period. Between January and June 2024, 6,185 individual entrepreneurs expressed a desire to start their own business and officially registered their business.
According to the Main Department of the State Tax Service in Kharkiv Region, as of July 01, 2024, 79.9 thousand legal entities and 119.0 thousand individual entrepreneurs were registered in Kharkiv (as of January 01, 2024, 79.2 thousand legal entities and 118.2 thousand individual entrepreneurs). In the first half of 2024, 32 new stationary restaurant businesses with 1,164 seats were opened in Kharkiv. Kharkiv retail chains are developing, with the total number of enterprises amounting to more than 400 units (as of 01.07.2023 - 324).
The retail turnover of enterprises (legal entities) in Kharkiv, the main economic activity of the city. Kharkiv, whose main economic activity is retail trade, amounted to UAH 27.4 billion in the first half of 2024. The growth of retail turnover compared to the same period in 2023 (in actual prices) amounted to 120.2%.
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
In the first half of 2024, the budget of the Kharkiv city territorial community received revenues in the amount of UAH 10,057.53 million. Of this amount, UAH 6,834.77 million is own revenues (67.86% of the total). Compared to the same period in 2023, the amount of total revenues increased by 18.09% (+UAH 1540.83 million), while the amount of own revenues decreased by 6.73% (-UAH 492.33 million).
The main share of the city's own revenues is formed by tax revenues. Their volume in the first half of 2024 amounted to UAH 6.53 billion (95.67% of own revenues and 64.92% of all community budget revenues in the first half of 2024). The most significant item of tax revenues is the personal income tax - according to the results of the first half of 2024, its share is 56.35% of tax revenues.
The budget expenditures of the Kharkiv City Territorial Community in the first half of 2024 amounted to UAH 7.7 billion (+14.93% year-on-year). The constant shelling of the region and the city of Kharkiv determined the priority financing of expenditures aimed at ensuring the city's vital functions and carrying out repair and restoration works on infrastructure facilities. Expenditures on housing and communal services accounted for a significant share of total expenditures (22.53% of expenditures, excluding intergovernmental transfers). Expenditures on economic activity amounted to 28.08% of the total. Also, a significant part of the community budget expenditures was directed to education (31.7% of total expenditures, +6.29% compared to the first half of 2023).
The debt policy of the Kharkiv city authorities is determined by the need to attract additional funding for the implementation of projects to restore urban infrastructure. Borrowings are made by both the Kharkiv City Council and municipal enterprises, including under the guarantees of the city authorities. The ratio of direct debt as of July 01, 2024 to the amount of own revenues of the budget of the Kharkiv City Council for 2023 was 2.52%.
As of 01.07.2024, the total amount of balances on guaranteed loans of the city council amounted to UAH 698,358.76 thousand (4.88% of the planned own revenues of the community for 2024). The amount of direct debt and guaranteed loans (taking into account only the actual balances as of 01.07.2024) amounted to UAH 1,659.24 million (11.58% of the planned own revenues of the community budget for 2024). The amount of consolidated debt, excluding overdue accounts payable of utility companies, as of July 01, 2024 amounted to UAH 8,161.08 million (56.97% of the planned own revenues of the community budget for 2024).
Taking into account the overdue accounts payable of utility companies, the amount of consolidated debt increases to UAH 39.16 billion, which is 2.7 times higher than the amount of planned own revenues of the community budget for 2024. Thus, the direct debt burden is low, while the consolidated debt burden is significant. In addition, given that a significant part of the debt is denominated in foreign currency, there are currency risks. Risks are partially mitigated by the long maturity of the principal under subordinated loan agreements and the absence of peak loads. Against the background of constant rocket attacks, there were periodic delays in servicing borrowed funds by utility companies.
3. Natural and geographical potential and availability of material resources for business development
The specific economic and geographical position of Kharkiv is its location at the intersection of a number of important transportation routes. Today, it is a very large transportation hub: railways and highways lead to Donbas, Crimea, the ports of the Black, Azov and Baltic Seas, and many large industrial centers located outside Ukraine.
Kharkiv has a strong human resource potential - it is a key scientific center 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 organizations. At the same time, competition for business and the cost of labor resources are lower compared to the capital.
The city has an extensive transport, industrial, trade and business infrastructure, which creates favorable 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 tangible 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
The 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 cooperates with the international rating agencies Moody's Investors Service Inc. and Fitch Ratings Ltd.
As of 19.10.2024, 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 at the level of "CCC", long-term local currency IDRs at the level of "CCC".
On 09.02.2024, Moody's Investors Service changed the credit outlook on Kharkiv from “negative” to “stable” and affirmed the long-term foreign and local currency issuer rating at the level of “Caa3” and the basic credit assessment (BCA) at the level of “caa3”. Moody's notes that Kharkiv has been able to adapt to the military conflict and continue to fulfill its administrative responsibilities by adjusting services and minimizing 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 debts, which remain at a very low level. Having affirmed the rating of "Caa3", Moody's left the rating of the city, having affirmed the rating of "Caa3", Moody's Investors Service Inc. left the rating of the city of Kharkiv one notch above the rating of the government of Ukraine.
On 17.09.2024 Fitch Ratings - Warsaw upgraded the long-term local currency rating from "CCC-" to "CCC".
On 18.10.2024, Fitch Ratings - Warsaw upgraded the long-term foreign currency issuer default ratings of Kharkiv city (IDR) to "CCC" from "CC". Fitch also affirmed the long-term local currency rating at "CCC" grade.
The city has a program to support the development of entrepreneurship in Kharkiv for 2018-2027. The implementation of the Program for Strengthening the Positive International Image and Development of International Cooperation of Kharkiv for 2021-2025 and the implementation of the City Program of Innovation and Investment Activities and Image Projects for 2017-2025 is ongoing. The city has a 30-member Coordination Council for Entrepreneurship Development under Kharkiv Mayor, chaired by the mayor.
The Council acts as a feedback loop between local governments, managers of small businesses, and business associations of the city. There is also an Industrial Policy Council under the Kharkiv City Mayor. The portal “Entrepreneurship and Consumer Market of Kharkiv” and the electronic service “Business Navigator” are updated on a regular basis. In addition, the electronic services Mentoring Assistance and Online Consultant are available for entrepreneurs. These are services that allow entrepreneurs to receive free assistance in solving business problems and provide them with professional support in starting and running a business, as well as seminars, round tables and trainings for entrepreneurs.
There is also a mechanism for providing financial support to small and medium-sized enterprises through partial compensation from the budget of the Kharkiv city territorial community of interest rates on loans provided by banking institutions for the implementation of business projects.
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
On 17.09.2024 Fitch Ratings - Warsaw upgraded the long-term local currency rating from "CCC-" to "CCC".
On 18.10.2024, Fitch Ratings - Warsaw upgraded the long-term foreign currency issuer default ratings of Kharkiv city (IDR) to "CCC" from "CC". Fitch also affirmed the long-term local currency rating at "CCC" grade.
The city has a program to support the development of entrepreneurship in Kharkiv for 2018-2027. The implementation of the Program for Strengthening the Positive International Image and Development of International Cooperation of Kharkiv for 2021-2025 and the implementation of the City Program of Innovation and Investment Activities and Image Projects for 2017-2025 is ongoing. The city has a 30-member Coordination Council for Entrepreneurship Development under Kharkiv Mayor, chaired by the mayor.
The Council acts as a feedback loop between local governments, managers of small businesses, and business associations of the city. There is also an Industrial Policy Council under the Kharkiv City Mayor. The portal “Entrepreneurship and Consumer Market of Kharkiv” and the electronic service “Business Navigator” are updated on a regular basis. In addition, the electronic services Mentoring Assistance and Online Consultant are available for entrepreneurs. These are services that allow entrepreneurs to receive free assistance in solving business problems and provide them with professional support in starting and running a business, as well as seminars, round tables and trainings for entrepreneurs.
There is also a mechanism for providing financial support to small and medium-sized enterprises through partial compensation from the budget of the Kharkiv city territorial community of interest rates on loans provided by banking institutions for the implementation of business projects.
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