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 characterized 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. During the period of full-scale war (March-December 2022), 11,416 individual entrepreneurs ceased operations. In March-December 2022, 267 individual entrepreneurs moved their business out of Kharkiv and changed their legal address to another region or territorial community. Between January and June 2023, 9,731 individual entrepreneurs ceased operations. 467 individual entrepreneurs moved their business out of Kharkiv and changed their legal address to another region or territorial community.
But despite the hostilities, entrepreneurs are looking for new opportunities to develop their business in extreme conditions. Thus, according to the Main Department of the State Tax Service in Kharkiv region, 6,470 individual entrepreneurs expressed a desire to start their own business and officially registered their business in March-December 2022, and 6,181 individual entrepreneurs in January-June 2023. In 2023, 611 individual entrepreneurs changed their tax address to the city of Kharkiv.
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 the Kharkiv city territorial community for 2022, it was possible to avoid a critical reduction in the main revenue sources and ensure a balanced budget, optimize 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 the first half of 2023, the community’s budget revenues amounted to UAH 8,516.7 million (an increase of 12.29% compared to the same period in 2022). The community’s own revenues amounted to UAH 7,317.21 million (up 19.82% compared to the first half of 2022) and accounted for 85.92% of total revenues (compared to 80.51% in the first half of 2022). Revenue targets for the half-year were fulfilled by 100.9%, including 111.4% for the general fund, 108.8% for the special fund, and 64.2% for transfers.
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 the Kharkiv City Council and municipal enterprises, including under guarantees of the city authorities. The total amount of direct debt as of 01.07.2023 amounted to UAH 960.89 million. The ratio of direct debt to the volume of planned own revenues of the budget of Kharkiv city council in 2023 amounted to 6.72%.
At the time of the rating update, the amount of direct debt amounted to UAH 360.89 million (2.5% of the planned own revenues for 2023). The total amount of balances on guaranteed loans of the city council as of 01.07.2023 was equal to 5.11% of the planned own revenues of the community for 2023. As of July 01, 2023, the amount of consolidated debt excluding overdue accounts payable of utility companies amounted to 55.93% of the planned own revenues of the community budget for 2023.
Taking into account the overdue accounts payable of utility companies, the amount of consolidated debt increases to UAH 34 billion, which is 2.4 times higher than the amount of planned own revenues of the community budget for 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 repayment period of the principal under subordinated loan agreements and the absence of peak loads.
Against the backdrop of constant rocket attacks, there were some delays in servicing the borrowed funds. However, despite the ongoing hostilities, there is an improvement in payment discipline.
3. Natural and geographical potential and availability of material resources for business development
The peculiarity of the economic and geographical location of Kharkiv is its location at the intersection of a number of important transportation routes. Today, the city 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 resources 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 complications in doing business (compared to cities located far from the military confrontation line).
4. Business environment and investment policy of 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 cooperates with the international rating agencies Moody’s Investors Service Inc. and Fitch Ratings Ltd.
As of 01.07.2023, 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 «Caa3» grade, negative outlook, basic credit assessment at «Caa3» grade.
- Fitch Ratings Ltd – long-term foreign and local currency issuer default ratings (IDRs) at «CC» grade, long-term local currency IDRs at «CCC-» grade.
The city has a Program for Supporting 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.
Since September 2016, the information resource «Investor Navigator. Kharkiv», which aims 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 commercialize 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.
Active work is underway to promote the city’s investment potential. 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.
