The credit rating was assigned to the Lipetsk Region (hereinafter, the Region) basing on high dependence of its tax revenues on the largest taxpayer, consistent budgetary discipline and flexible budget spendings, excessive liquidity (that covers about 68% of the Region’s total market debt) and well-balanced debt profile.

The Lipetsk Region is located in the Central Federal District and borders with six other regions. 1.1 mln people live in the Region. The Gross Regional Product (GRP) amounted to RUB 429 bln in 2015 (39th place among Russian regions). The Region hosts Novolipetsk Steel (NLMK), the largest Russian and world’s 16th steel manufacturer, with the production volume of 16.6 mln tons in 2016.

Key rating assessment factors

The regional economy’s backbone is metal industry and new economic growth areas. In 2013–2016, the average annual amount of exports by Region’s enterprises was 40% of the GRP. The 2014–2015 ruble devaluation increased the competitiveness of metal products on international markets, which is positive for the Region’s economy. Notwithstanding the dominance of metal industry (as the Region’s economy is ill-diversified), the dependence of the GRP and the budget of the Lipetsk Region on the international steel market has lessened significantly in the last seven years, driven by fast-growing food industry, agriculture, wholesale and retail trade, services industry, and real estate sector.

A well-balanced budget with high tax revenues and moderate mandatory expenditures. The Region’s budget features a high share of tax and non-tax revenues (82% on average). The tax revenue profile is quite volatile in terms of tax type, as the profit tax revenues have grown from 39% to 43% in 2014–2016. The share of mandatory expenditures is moderate (65%). The capital expenditures are relatively high (about 20%). Stress analysis carried out by ACRA shows that the Region’s credit quality is immune to the negative scenario under which all tax and non-tax revenues fall by 9% in 2017–2018 against 2016. Such immunity stems from the current flexible profile of budget expenditures.

A well-balanced budget debt profile with a moderate risk of peak payments in 2017–2018. Budget loans raised in 2016–2017 allowed the Region to decrease the debt service costs on the backdrop of a declining share of bank loans. Notwithstanding the expected repayment of 65% of the Region’s debt in 2017–2018, ACRA assesses the budget burden as moderate because, as at June 01, 2017, the amount of funds in the single budget account, except federal budget funds, was 68% of the entire market debt of the Region.

Excess liquidity excludes the need for short-term borrowings. In the last two years, the monthly average budget account balance was about RUB 6.5 bln, which is comparable with annual debt repayments. There were no cash deficiencies, and the Region made no federal treasury borrowings or short-term bank borrowings to cover current spending needs.

Key assumptions

  • High share of metal industry in the GRP profile;
  • Further development and diversification of non-metal industries and sectors of the regional economy;
  • Debt portfolio drifting to longer-term borrowings;
  • Mandatory budget expenditures will remain under strict control;
  • Maintaining a high level of liquidity.

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:

  • Further development and diversification of non-metal industries and sectors of the regional economy;
  • Debt portfolio drifting to longer-term borrowings.

A negative rating action may be prompted by:

  • Significant deterioration in financial stanging of NLMK, which may affect the Region’s budget;
  • Mandatory budget expenditures grow up to over 70%;
  • Debt burden increase by over 2.6x of the operating balance.

Regulatory disclosure

The credit rating has 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 credit rating has been assigned to the Lipetsk Region for the first time. The credit rating and credit rating outlook are expected to be revised within 182 days following the rating action (July 06, 2017).

The credit rating was assigned based on the data provided by the Lipetsk Region, 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 rating is solicited, and the Lipetsk Region participated in its assignment.

No material discrepancies between the data provided and the data officially disclosed by the Lipetsk Region in its financial report have been discovered.

ACRA provided no additional services to the Lipetsk Region. No conflicts of interest were discovered in the course of credit rating assignment.

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Analysts

Ilya Tsypkin
Senior Analyst, Sub-sovereign Ratings Group
+7 (495) 139 03 45
Elena Anisimova
Senior Director - Head of Sub-sovereign Ratings Group
+7 (495) 139 04 86
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