The credit rating of the Chelyabinsk Region (hereinafter, the Region) is based on the Region’s low debt load, smooth debt repayment schedule, and high share of capital expenditures. The rating is constrained by regional economic development indicators, some of which are below national averages, the dependence of budget revenues on the dominant industry, as well as the budget’s growing need for debt financing.
The Chelyabinsk Region is located in the Ural Federal District. Three and a half million people live in the Region, which is just over 2% of the Russian population. The Region’s GRP amounted to RUB 1.546 tln in 2019 or about 1.7% of the total GRP of Russia’s regions.
Key rating assessment factors
The significant budget deficit is the result of major growth of expenses. In 2020, the Region’s budget revenues amounted to RUB 198.0 bln, which is 13% higher than in 2019. At the same time, tax and non-tax revenues (TNTR) fell by 6% in the same period, including profit tax revenues, which fell by 15%. The latter was partly due to falling demand for metal industry products in H1 2020. Transfers from the federal budget to the Region’s budget in 2020 increased by 80% to RUB 70.3 bln, which is the highest value recorded in the entire analyzed period. Budget expenditures increased by 29% in 2020 (amid a national average increase of 15%) and reached RUB 227.5 bln. Over the past year, the Region’s budget expenditures on healthcare increased by almost twofold. The budget deficit, including funds used to address the consequences of the coronavirus pandemic, amounted to RUB 29.5 bln (around 23% of TNTR). This deficit was largely covered using available liquidity. Nevertheless, the Region had to resort to new borrowings in order to finance the remaining part of the deficit.
According to the Region’s revised plan specified in the law on its budget1, TNTR is expected to grow by 9% compared to 2020, while overall budget revenues are expected to decline by 5% to RUB 189.0 bln due to transfers from the federal budget falling by 29%. In connection with this, the Region plans to cut its budget expenditures by 7% in 2021. The planned budget deficit will reach 16% of TNTR and be financed by attracting debt.
1 Law of the Chelyabinsk Region No. 294-ZO dated December 28, 2020 (with amendments dated March 2, 2021) “On the regional budget in 2021 and the planned period of 2022 and 2023”.
As of the end of the first three months of 2021, the Region’s revenues increased by 28.2% compared to the indicator for the same period last year. Furthermore, profit tax increased by 75.3%. The volume of transfers was 28.2% higher than the indicator recorded for 3M 2020. The expenditure side of the budget grew by 17.6%. A RUB 8.4 bln budget surplus was recorded for the first three months of 2021 (compared to RUB 3.8 bln a year before).
The averaged2 ratio of the balance of current operations to current revenues of the Region in 2017–2021 amounts to around 18%, which corresponds to a moderately high level according to ACRA’s methodology. The ratio of the averaged modified budget deficit to current revenues may reach -7%. These indicators show that although the Region’s current revenues are sufficient to cover its current expenditures, it has a growing need to resort to borrowing to finance its capital expenditures.
2 Hereinafter, averages are calculated according to the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation.
The averaged share of internal revenues in the Region’s budget remains moderately high (79% in 2017–2021). The averaged share of capital expenditures in the Region’s total expenditures (excluding subventions) in the specified period is assessed at 31%, which corresponds to high flexibility of budget expenditures according to ACRA’s methodology.
Debt load is still low, despite considerable growth of debt. In 2020, the Region’s public debt grew by 61% due to financing the budget deficit, and amounted to RUB 25.7 bln as of January 1, 2021. The Region’s debt included budget loans (55%), bonds (27%), and guarantees provided (around 18%). The debt repayment schedule is balanced and there are no significant peak payment periods. The maximum volume of repayments in the next five years is scheduled for 2021 and amounts to 22% of the Region’s total debt as of January 1, 2021, including a budget loan provided at the end of 2020 to refinance a budget loan that was used to replenish account balances.
As of April 1, 2021, the debt repayment schedule was practically unchanged, while the absolute value of debt had declined by RUB 0.1 bln due to the expiration of some of its guarantees.
As of the end of 2020, the ratio of the Region’s debt to its current revenues was 15%, which, according to ACRA’s methodology, corresponds to a low debt load. A year before, this ratio amounted to 10%. According to the Agency’s assessments, the debt load may grow to 28% as of the end of 2021 due to financing of the planned deficit. Nevertheless, it will remain low. Interest expenditures are not a burden on the Region’s budget — interest expenditures averaged for 2017–2021 do not exceed 0.5% of total budget expenditures (excluding subventions).
The Region’s accumulated liquidity allowed it to finance the budget deficit at the end of the year. As of January 1, 2021, the Region’s account balances were insignificant. The bulk of accumulated funds were used to finance the 2020 budget deficit, which was the result of considerable growth in spending and lower TNTR due to the deterioration of the economic situation. This also made it possible to increase debt to a lesser extent. Since the start of 2020, end-of-month account balances have covered around 88% of the budget’s monthly expenditures. As of April 1, 2021, the Region’s available liquidity had increased considerably compared to the start of the year.
The Region placed deposits until December 2020. A short-term loan was obtained from the Federal Treasury Department in December last year and then refinanced using a budget loan. The Region did not have any open undrawn credit lines due in more than a year at the start of 2021.
Moderately diversified economy with high concentration on the metal industry. According to ACRA’s calculations, more than 30% of the Region’s tax revenues may come from metalworking sector. In 2020, 12 of the 20 largest companies in the Region in terms of revenues operated in areas related to the metal industry. The largest companies in the Region are PJSC MMK, PJSC ChTPZ, and PJSC ChMK. In 2016–2019, the Region’s averaged GRP per capita amounted to 71% of the national average. The averaged unemployment rate for 2017−2020 was 6.2%. In 2020, unemployment in the Region (according to the ILO’s methodology) was 6.8%. In 2020, the average monthly salary was more than three times higher than the regional subsistence minimum.
- Internal budget revenues increasing and expenses decreasing as per the Region’s revised plan;
- Budget deficit (including funds to address the consequences of the coronavirus pandemic) at no higher than 16% of the Region’s TNTR;
- Debt growing by no more than 2x in 2021 compared to 2020.
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:
- Gradual growth of accumulated budget liquidity to the level of indicators as of mid-2020;
- Execution of the budget without a deficit in 2021;
- Reduced need for debt financing.
A negative rating action may be prompted by:
- Growth in budget expenditures unaccompanied by higher revenues;
- Increased need for debt financing;
- Debt to current revenues ratio exceeding 30%;
- Absence of free liquidity in budget accounts.
Chelyabinsk Region, 35001 (ISIN RU000A102FV5), maturity date: November 30, 2027, issue volume: RUB 7 bln — AA(RU).
Chelyabinsk Region, 35002 (ISIN RU000A102L61), maturity date: December 17, 2027, issue volume: RUB 8 bln — AA(RU).
Chelyabinsk Region, 35002 (ISIN RU000A102L79), maturity date: December 17, 2027, issue volume: RUB 8 bln — AA(RU).
Rationale. In the Agency’s opinion, the bonds of the Chelyabinsk Region are senior unsecured debt instruments, the credit ratings of which correspond to the credit rating of the Chelyabinsk Region.
The credit ratings of the Chelyabinsk Region and the bond issues of the Chelyabinsk Region (ISIN RU000A102FV5, RU000A102L61, RU000A102L79) 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. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments on the National Scale for the Russian Federation was also applied to assign credit ratings to the above issues.
The credit ratings of the Chelyabinsk Region and the bond issues of the Chelyabinsk Region (ISIN RU000A102FV5, RU000A102L61, RU000A102L79) were published by ACRA for the first time on December 26, 2017, December 1, 2020, December 21, 2020, and December 21, 2020, respectively. The credit rating and its outlook, as well as the credit ratings of the government securities of the Chelyabinsk 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 data provided by the Chelyabinsk Region, information from publicly available sources (the Ministry of Finance, the Federal State Statistics Service, and the Federal Tax Service), and ACRA’s own databases. The credit ratings are solicited, and the Government of the Chelyabinsk Region participated in their assignment.
In assigning the credit ratings, ACRA used only information, the quality and reliability of which was, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided additional services to the Government of the Chelyabinsk Region. No conflicts of interest were discovered in the course of credit rating assignment.