The credit rating of Nizhny Novgorod (hereinafter, Nizhny Novgorod, or the City) is based on the City’s relatively high economy indicators, and limited flexibility of budget expenditures.
The credit rating outlook has been changed to reflect ACRA's opinion on the impossibility to reduce the refinancing risks significantly in the short-term period.
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 ASSESSMENT FACTORS
Remaining refinancing risks. After the Nizhny Novgorod Region granted to the City a RUB 5.1 bln budgetary loan due in 2026, the City's debt repayment schedule has changed significantly. At the same time, as of January 1, 2022, the share of debt subject to repayment (refinancing) in the current year was 61%. Nizhny Novgorod has sufficient liquidity and committed credit lines available to refinance the majority of its obligations, but available resources are short-term. In the current conditions, debt refinancing with long-term or medium-term instruments is unlikely.
The City's debt load expected at the end of this year should not exceed 40% of current revenues or 70% 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 historically typical of budgets of municipal entities (ME).
Interest expenses are not burdensome: annual payments are at or below 4% of expenditures, excluding subventions. At the same time, in the current market environment, the risks of growing interest expenses are obvious.
The ratio of City's debt to gross municipal product (GMP) is not calculated due to the absence of GMP. According to ACRA's estimates, this ratio might be much lower than 20%.
To acquire public transport vehicles, Nizhny Novgorod usually enters into lease agreements, which can be viewed as an indirect debt load.
Moderate level of budget liquidity. The average monthly balances held in the City's budget accounts do not cover a significant amount of its monthly expenses or a significant share of its debt, which is typical for MEs. To replenish account balances, the City borrows, if possible, loans from the Federal Treasury Department (FTD). In addition, Nizhny Novgorod uses funds from municipal organizations. In order to refinance the current amount of debt, the City has, in addition to account balances, a significant amount of undrawn credit limits, which, however, are short-term (the City must repay them by the end of this year).
At the end of the year, the estimated liquidity ratio of the municipal budget should amount to about 10%.
High self-sufficiency and limited flexibility of the municipal budget due to the high share of capital expenditures funded by the regional budget. In 2021, budget revenues increased by 20%, including TNTR – by 16% and transfers – by 22%. The increase in TNTR was caused by a 13% increase in personal income tax revenues, as well as a 59% increase in total income tax revenues due to consistent changes in the distribution proportions for this type of tax revenues between the regional and municipal budgets, and legislative changes at the federal level.
In 2022, TNTR are expected to grow by 6%, including 6% for personal income tax, 12% for total income tax, and 20% for property taxes (due to an increase in the tax base). The current version of the City Budget Decision includes a 7% decrease in transfers, however, at the time of analysis, these data were no longer relevant, and this year, the volume of transfers may exceed that in the previous year.
The City's expenditures grew by 19% in 2021; in 2022, they are expected to grow by 2%. Due to changes in transfers, ACRA is of the opinion that expenditures will increase more significantly. However, the City expects budget execution in 2022 to be deficit-free.
The averaged1 ratio of current operations balance to current revenues for 2018–2022 will amount to 12.80%. Over the entire period under review, the City's balance of current operations is positive.
The averaged share of TNTR excluding subventions for 2018–2022 will equal 60.8%, which is rather high for a ME.
The averaged ratio of capital expenditures to total expenditures is very high (about 45%), but it is mostly backed by transfers.
The ratio of averaged modified budget deficit to averaged current revenues is slightly negative.
1 Hereinafter, averages are calculated according to the Methodology for Assigning Credit Ratings to Regions and Municipal Entities 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. The unemployment rate calculated according to the International Labor Organization’s methodology is low in the Nizhny Novgorod Region. The official unemployment rate in the City is almost equal to that observed at the regional level.
The City's GMP is not calculated. The annual GRP of the Nizhny Novgorod Region is about 77–78% of the national average.
In 9M 2021, the volume of goods, works and services manufactured and provided by large and medium enterprises in the Manufacturing Industries segment has grown by almost 32% y-o-y. In 2020, this volume decreased by 2.1% y-o-y.
KEY ASSUMPTIONS
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Stable budget policy of the Nizhny Novgorod Region with respect to allocation of personal income tax revenues and a portion of total income tax revenues;
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Maintaining the sufficient ratio of current operations balance to current revenues;
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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:
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A decline in the share of debt due in the current or next year to or below 40% and a change in the debt policy in favor of long-term financial instruments;
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A significant growth in budget liquidity;
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A growth in the City's revenues outrunning its expenditures.
A negative rating action may be prompted by:
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Materialization of refinancing risks in the short term;
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Lower share of TNTR in the budget caused by a shortage in internal revenues;
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Changes in the regional laws increasing the share of personal income tax revenues and a portion of total income tax revenues in favor of the Nizhny Novgorod Region;
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A growth in the City's current budget expenditures not supported by a growth in revenues;
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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 issued by Nizhny Novgorod is a senior unsecured debt instrument, and its credit rating is equal to the credit rating of Nizhny Novgorod.
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 Assigning Credit Ratings to Regions and Municipal Entities 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 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.
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 no additional services to the Administration of Nizhny Novgorod. No conflicts of interest were identified in the course of credit rating assignment.