The credit rating of Nizhny Novgorod (hereinafter, Nizhny Novgorod, or the City) is based on the City’s relatively high economy indicators, uneven debt repayment schedule, and limited flexibility of budget expenditures.
Nizhny Novgorod is the administrative center of the Nizhny Novgorod Region and the Volga Federal District (VFD). It is Russia’s fifth largest city, with a population of over 1.25 million. Nizhny Novgorod is a major transportation hub of the VFD and one of Russia’s largest industrial centers.
Key rating assessment factors
Uneven debt repayment schedule. The debt repayment schedule is uneven since the City regularly borrows short-term bank loans. At the time of the rating analysis, bank loans, which are all due in 2021, accounted for 58% of Nizhny Novgorod’s total debt. A further 38% of debt was represented by bonds, and the remaining share comprised budget loans. Consequently, as of January 1, 2021, the share of short-term debt was 77% of the total debt.
The current version of the Resolution on the City’s Budget envisages the placement of a bond. ACRA expects that this will reduce refinancing risks and optimize the debt repayment schedule.
As of December 31, 2020, the City's debt load amounted to 43% of current revenues or 80% of tax and non-tax revenues (TNTR). The substantial difference between these indicators is due to a large amount of revenues represented by transfers, which are traditionally typical of municipal budgets. In 2021, the debt load may increase slightly up to 47% of current revenues, but it will not affect the credit rating.
Interest expenses are not burdensome: annual payments are at or below 4% of expenditures, excluding subventions.
To purchase public transport vehicles, Nizhny Novgorod usually enters into lease agreements, which can be viewed as indirect debt load.
Moderate liquidity. In 2020, Nizhny Novgorod’s average monthly budget account balances were insufficient to cover its monthly expenditures. As of January 1, 2021, account balances were sufficient to cover up to 10% of the debt due in 2021. To replenish its budget accounts in 2020, the City borrowed two loans from the FTD. In addition, the City uses funds from municipal entities. Therefore, the amount of cash available to the City is sufficient to cover the planned expenditures. On the other hand, the City has no cash to refinance the short-term debt this year, and at the beginning of 2021, there were no undrawn credit lines with maturities exceeding 12 months.
To save on interest expenses, the City has been substituting borrowed funds for cheaper funding sources, if available.
The flexibility of budget expenses is limited due to the dependence on higher-level budgets. Each year, the City's budget has been executed with deficit. In 2020, the TNTR grew by 11%, of which two thirds were small business income tax revenues. This growth is explained by the fact that since 2019, 20% of taxes collected as part of the simplified taxation scheme have been transferred to the City's budget. Gratuitous receipts grew by 20% due to an increase in other inter-budget transfers. As a result, the small business income tax revenues grew by 16% y-o-y. At the same time, expenditures went up by 12%, so that in 2020, the deficit amounted to 2.6% of the TNTR.
The current version of the City's Resolution on the Budget indicates that in 2021, the TNTR will remain the same as in the previous year and amount to RUB 16 bln. The main impact on the TNTR will be caused by a 15% decrease in non-tax revenues and a 21% and 9% increase in small business income tax revenues and property tax revenues, respectively. At the same time, total expenditures will grow by 2% up to RUB 39 bln. In this connection, the budget deficit is expected to equal 6% of the TNTR.
The averaged1 share of TNTR excluding subventions for 2017–2021 will equal 60%. The largest contributor to the City budget is personal income tax (up to half of TNTR), which grew by 8% in 2020. In addition to personal income tax and small business income taxes, a significant amount of other internal revenues comes from property taxes (grew by 6% in the last year), and revenues from rental payments (despite the pandemic, these revenues did not decrease in 2020).
The current operations balance to current income ratio is moderately high: in 2020, it was 11%, and it is not expected to change in 2021. The averaged ratio for 2017–2021 will exceed 10%.
The City’s capital expenditures are traditionally very high, totaling 40% of expenditures (excluding subventions) in 2017–2021. However, higher-level budgets finance the bulk of these expenditures.
1 Hereinafter, averages are calculated according to the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation.
Relatively high level of economic development. Nizhny Novgorod is one of the largest industrial centers in the VFD. The average accrued nominal wage covering all entities in the City is almost four times higher than the subsistence minimum in the Nizhny Novgorod Region. Unemployment calculated according to the International Labor Organization’s methodology is low in the Nizhny Novgorod Region.
In the nine months of 2020, the volume of goods, works and services manufactured and provided in the "manufacturing industries" segment decreased by 8.9% y-o-y. This is due to a 15% decrease in the volume of motor vehicle manufacture possibly caused by the coronavirus pandemic.
Key assumptions
- Stable budget policy of the Nizhny Novgorod Region in terms of allocation of income tax revenues;
- No changes in the ratio of current operations balance to current revenues;
- Continued practices of making leasing contracts to finance the development of the City’s transport infrastructure.
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:
- A significant growth in budget liquidity;
- Refinancing the current share of short-term debt with longer-term financial instruments;
- A change in the debt policies in favor of long-term financial instruments.
A negative rating action may be prompted by:
- Lower share of TNTR in the budget caused by a shortage in internal revenues;
- Changes in the regional laws increasing the share of personal income tax revenues and revenues from the tax levied in connection with the simplified taxation system in favor of the Nizhny Novgorod Region;
- Higher debt load.
Issue ratings
Nizhny Novgorod, 34002 (ISIN RU000A0ZYJ00), maturity date: December 5, 2022, issue volume: RUB 5 bln — A-(RU).
Rationale. In ACRA’s opinion, the bond listed above issued by Nizhny Novgorod is a senior unsecured debt instrument, the credit rating of which corresponds to the credit rating of Nizhny Novgorod, i.e. A-(RU).
Regulatory disclosure
The credit ratings were assigned to Nizhny Novgorod and the bond issued by Nizhny Novgorod (ISIN RU000A0ZYJ00) 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. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied to assign the credit rating to the above issue.
The credit ratings of Nizhny Novgorod and the bond issued by Nizhny Novgorod (ISIN RU000A0ZYJ00) were published by ACRA for the first time on November 21, 2017, and November 29, 2017, respectively.
The credit rating of Nizhny Novgorod and its outlook, as well as the credit rating of the bond issued by Nizhny Novgorod (ISIN RU000A0ZYJ00), 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 data provided by Nizhny Novgorod, information from publicly available sources (the 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 Administration of Nizhny Novgorod participated in their assignment.
No material discrepancies between the provided data and data officially disclosed by Nizhny Novgorod in its financial statements have been discovered.
ACRA provided no additional services to the Administration of Nizhny Novgorod. No conflicts of interest were discovered in the course of credit rating assignment.
