The credit rating of the Lipetsk Region (hereinafter, the Region) is based on its low debt load, stable budget profile metrics, and a moderately high share of internal revenues and capital expenses. The rating is constrained by the budget dependence on the largest taxpayer.
The Lipetsk Region is part of the Central Federal District. The Region is home to 1.1 million people (around 1% of Russia’s population). According to the Region’s estimates, its GRP amounted to RUB 587 bln in 2019 (around 0.7% of the total GRP of Russia’s regions).
Key rating assessment factors
Potential decrease in revenues may be offset by decreasing capital expenses. In 2019, the Region’s budget deficit amounted to 7% (RUB 3.4 bln) of tax and nontax revenues (hereinafter, TNTRs or internal revenues). Internal budget revenues decreased by 6% last year mainly because of reduced profit tax receipts in the metal sector. Total profit tax receipts decreased by 19% (RUB 4.8 bln). Personal income tax receipts grew by 6% (RUB 0.8 bln), receipts from excise taxes, by 21% (RUB 0.8 bln). Federal budget transfers grew in 2019 by 24% (RUB 3.0 bln) compared to 2018. Total budget revenues were virtually unchanged compared to the previous year, and spending increased by 17% (RUB 9.8 bln).
The regional budget law provides for an increase in internal revenues and expenses in 2020 by 4% and 11%, respectively. ACRA expects tax receipts to decrease by approximately 15% in 2020 because of unfavorable macroeconomic environment. If this is the case, the Agency would expect the Region to reduce budget spending by decreasing capital expenses while keeping current costs on par with the last year.
The average1 ratio of the current account balance to current revenues (based on ACRA’s methodology) will be 13% in 2016–2020, and the ratio of the average modified budget deficit to current revenues will not exceed -1%. These metrics show sufficient current revenues to cover current expenses and moderate need for borrowings to finance capital expenses.
Share of the Region’s internal revenues in its budget remains moderately high: the average share of internal revenues will be 78% in 2016–2020. We estimate the average share of capital expenses in the Region’s total spending (excluding subventions) over that period at 24%.
1 Hereinafter, the averages are calculated according to the Methodology for Assigning Credit Ratings to Regional and Municipal Authorities of the Russian Federation.
Low debt load. In 2019, the Region’s debt amounted to RUB 12.6 bln, which is 16% (RUB 2.4 bln) less than the last year’s metric. At the same time, the Lipetsk Region’s debt to current revenues ratio decreased from 26% to 22% over the same period. According to the planned parameters of the regional budget law, the Region’s debt will increase in 2020 by 11% (RUB 1.3 bln), with the debt load remaining at a comfortable level of 23%.
ACRA estimates that the debt to current revenues ratio may rise to 29% (which is also a low debt load level) at the end of 2020. This is possible because of a potential decline in the Region’s internal revenues accompanied by debt growth beyond the values planned in the law.
For more details, please see ACRA’s analytical commentary Support Measures for Regional Budgets dated April 21, 2020.
As of January 1, 2020, 49% of the Region’s debt was represented by budget loans, 46%, by bonds, 4%, by bank loans, and the rest, by guarantees. Share of interest expenses in total budget expenses is stable and low (1–2%).
According to the repayment schedule, the Lipetsk Region was to repay/refinance 25% of its debt obligations (RUB 3.2 bln) in 2020, 16% (RUB 2.0 bln), in 2021. However, the Lipetsk Region will not probably have to repay the planned volume of budget loans this year in connection with the support measures for the regions that have been adopted by Russia’s Ministry of Finance. Thus, it is possible that debt repayment/refinancing will only affect 20% (RUB 2.6 bln) of the debt portfolio this year.
As of May 1, 2020, the Region repaid all bank loans in the amount of RUB 0.5 bln and a part of bonds in the amount of RUB 0.9 bln. The debt was refinanced with a RUB 2.0 bln budget loan from the Federal Treasury. The Region’s debt as of that date was RUB 13.1 bln.
ACRA notes that the Region’s liquid account balances reduced more than twice year-on-year as of January 1, 2020. Nevertheless, account balances covered 34% of the debt portfolio at the beginning of 2020, which was comparable to the size of debt obligations to be repaid in 2020 and 2021. According to the current version of the budget law, account balances will be applied towards future deficits.
Moderately diversified economy strongly concentrated around the metals industry. According to ACRA’s calculations, the average share of tax revenues from the metal sector was 39% in 2016–2019. Historically, PAO NLMK has been the Region’s largest taxpayer. ACRA notes the risks in connection with the expected decrease in the Region’s budget receipts from metal sector companies, given the changing macroeconomic situation. At the same time, the Agency believes that the Region’s budget policy and debt policy will help it overcome short-term decline of TNTRs by 15% vs 2019 without any credit quality change.
The average GRP per capita in the Region was 87% of the average national level in 2015–2018. Unemployment in the Region in 2016–2019 did not exceed 4%. In 2019, the average monthly wage was more than three times higher than the regional subsistence level.
- Internal revenues declining by no more than 15% in 2020 vs 2019;
- Reduced capital expenses compared to 2019, with current expenses kept on par with 2019;
- No need in 2020 to repay the budget loans that were restructured in 2017;
- Debt growth by no more than 15% in 2020 vs 2019.
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:
- Increased budget liquidity;
- Keeping the current debt load level.
A negative rating action may be prompted by:
- Operational efficiency of the budget decreasing to below 10% combined with an increased need for debt financing;
- Absolute debt value increasing by more than 15% compared to 2019 without concurrent increase in TNTRs;
- Decrease in available liquidity.
Lipetsk Region Government Bond, 35010 (ISIN RU000A0ZZR33), maturity date: October 21, 2025, issue volume: RUB 3 bln — АА(RU);
Lipetsk Region Government Bond, 34011 (ISIN RU000A1013T3), maturity date: November 21, 2024, issue volume: RUB 2.5 bln — АA(RU).
Rationale. In ACRA’s opinion, the bonds listed above are senior unsecured debt instruments, the credit ratings of which correspond to the credit rating of the Lipetsk Region.
The credit ratings were assigned to the Lipetsk Region and the bonds issued by the Lipetsk Region (ISIN RU000A0ZZR33, RU000A1013T3) 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 credit ratings to the bond issues above, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation has also been used.
The credit ratings assigned to the Lipetsk Region and the bonds issued by the Lipetsk Region (ISIN RU000A0ZZR33, RU000A1013T3) were first published by ACRA on July 7, 2017, October 24, 2018, and November 21, 2019, respectively. The credit rating of the Lipetsk Region and its outlook and the credit ratings of the bonds issued by the Lipetsk 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 are based on data provided by the Lipetsk Region, information from publicly available sources (Ministry of Finance, Federal State Statistics Service, and Federal Tax Service), as well as ACRA’s own databases. The credit ratings are solicited, and the Administration of the Lipetsk Region participated in their assignment.
No material discrepancies between the provided data and data officially disclosed by the Lipetsk Region in its financial report have been discovered.
ACRA provided no additional services to the Administration of the Lipetsk Region. No conflicts of interest were identified in the course of the credit rating process.