The credit rating of the Belgorod Region (hereinafter, the Region) has been upgraded due to a decline in the debt load of the Region, which is a result of a decrease in the absolute debt and an increase in the operating balance (thanks to a prolonged period of high metal prices), and a change in the internal liquidity of the Region's budget. The rating is supported by stable budget discipline indicators, a balanced debt structure, and a well-developed infrastructure in the Region. The rating is limited by the regional economy indicators that do not exceed the country averages.
About 40% of Russia’s iron ore concentrate is produced in the Region. The local climate is favorable for non-cyclic sectors, including agricultural and food industries. This has a limited positive impact on the diversification of the regional economy, which is dependent on the mining sector.
Key rating assessment factors
The debt load has declined sharply. The 2018 regional budget was executed with a surplus, and a significant amount of guarantees has expired, which allowed the Region to reduce the debt by RUB 6.7 bln (16.5% of the total debt). Coupled with an increase in the operating balance, this led to a decrease in the debt-to-operating balance ratio from 1.4x in 2017 to 1.0x in 2018. By the end of this year, the ratio is expected to be about 1.25x. In 2019, the operating balance after interest charges is expected to exceed the amount of short-term debt by almost five times. The debt reduction rate demonstrated by the Region is much higher than that stipulated by the agreements with the Ministry of Finance of Russia.
As of May 1, 2019, the Region's debt amounted to RUB 30 bln (including 35% for bonds, 31% for budget loans, 14% for bank loans, and 20% for guarantees). The maximum share of debt refinancing (28%) will fall on 2020. According to the current version of the Region's budget law, the total amount of guarantees to be issued is small.
The budget deficit planned for the current year will be covered by account balances, including deposits.
Liquidity accumulated in 2018 will allow the Region to finance a potential budget deficit in 2019. In 2018, tax and non-tax revenues (TNTR) increased by 21% (from RUB 60.6 bln to RUB 73.5 bln), with more than a half of the increase coming from income tax paid by metal companies. As a result, the budget was executed with a surplus of RUB 8.1 bln (11% of TNTR), while the budget account balance amounted to RUB 10.1 bln. The operating balance grew by 24% as calculated in accordance with ACRA's methodology.
The Region has been financing its budgetary expenditures without any external borrowings: in 2016–2019, the annual average share of internal revenues (excluding subventions) is expected to reach 80%. Capital expenditures of the Region make up about 19% of expenses and are financed mainly at its own expense. At the same time, the share of mandatory expenses is moderate (in the specified period, it is expected to be 63%). According to ACRA's estimates, such structure of expenses will not change in the medium term.
Key assumptions
- The Region’s economy will depend on the trends in the key local industries;
- TNTR will decline by not more than 5% in 2019 against 2018;
- Maintaining a well-balanced debt management policy primarily by raising long-term loans with a regular repayment schedule;
- Gradual reduction in the debt load through sustainable repayments.
Potential outlook or rating change factors
The Stable outlook assumes that the rating will most likely stay unchanged within the
12 to 18-month horizon.
A positive rating action may be prompted by:
- Growing operating balance amid, among other things, declining share of mandatory expenditures;
- Improvement in debt load indicators amid growing operating balance and/or decreasing volume of guarantees issued along with repayment of debt obligations.
A negative rating action may be prompted by:
- Change in debt policy and time structure of debt;
- Higher debt service costs;
- Considerable decrease in tax revenues from the metal industry;
- 2019 Budget deficit exceeding 10% of TNTR.
Issue ratings
Belgorod Region Government, 35011 (ISIN RU000A0JXTW1), maturity date: June 11, 2024; issue volume: RUB 4 bln — AA-(RU).
Rationale. ACRA is of the opinion that the bond issued by the Belgorod Region has a status of senior unsecured debt. Therefore, the credit rating of this debt instrument corresponds to the credit rating of the Belgorod Region.
Regulatory disclosure
The credit ratings of the Belgorod Region and the bond issued by the Belgorod Region (ISIN RU000A0JXTW1) have been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities. In the course of assigning a credit rating to the bond issue above, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was applied.
The credit ratings of the Belgorod Region and the government bond issued by the Belgorod Region were first published by ACRA on June 13, 2017, and June 19, 2017, respectively. The credit rating of the Belgorod Region and its outlook and the credit rating of the government bond of the Belgorod Region are expected to be revised within 182 days following the publication date of this press release as per the Calendar of planned sovereign credit rating revisions and publications.
The credit ratings were assigned based on the data provided by the Belgorod Region, information from publicly available sources (the RF Ministry of Finance, the Federal State Statistics Service, and the Federal Tax Service), as well as ACRA’s own databases. The credit ratings are solicited, and the Government of the Belgorod Region participated in their assignment.
No material discrepancies between the provided data and the data officially disclosed by the Belgorod Region in its financial report have been discovered.
ACRA provided no additional services to the Government of the Belgorod Region. No conflicts of interest were discovered in the course of credit rating assignment.
