The credit rating of the Lipetsk Region (hereinafter, the Region) is based on the Region’s low debt load, smooth debt repayment schedule, and a substantial amount of funds held by the Region in its accounts. The rating is also supported by the Region's budget profile with balanced operating indicators, while the Region has no need for debt financing to cover its capital expenditures. The rating is constrained by the budget’s dependence on the largest taxpayer and the volatile structure of tax revenues.
The Lipetsk Region is part of the Central Federal District. The Region is home to 1.1 mln people (around 1% of Russia’s population). In 2020, the Region’s GRP amounted to RUB 619 bln (around 0.6% of the total GRP of Russia’s regions). According to the Region’s estimates, its GRP reached RUB 705 bln in 2021.
KEY ASSESSMENT FACTORS
Balanced budget indicators and no need for additional financing. The ratio of the current account balance to current revenues averaged1 for 2018–2022 will be 19%, while the current account balance for 2022 will remain positive, which indicates that current revenues are sufficient to finance current expenditures.
The averaged share of capital expenditures in total expenditures for 2018–2022 will be around 25%, which indicates that, as per ACRA’s methodology, the flexibility of budget expenditures is high. The Region independently finances around half of its capital expenditures.
The averaged share of tax and non-tax revenues (TNTR) in the Region’s revenues (excluding subventions) will amount to 79% this year. The averaged ratio of the modified budget deficit (MBD) to current expenditures for 2018–2022 is expected to be higher than 6%, although in 2022, the MBD is expected to be negative due to forecasted decline in revenues and significant increase in expenditures. The negative MBD indicates the Region's need to use accumulated liquidity to cover its capital expenditures.
In 2021, the Region’s budget revenues exceeded those in 2020 by more than 1.5x, which is explained mostly by extra revenues received from the Region's metal industry. TNTR almost doubled against 2020, with profit tax growing by more than three times, tax on goods and services increasing by 43%, and gross income taxes growing by 20%. At the same time, transfers declined by 17% while budget expenditures grew by mere 5%. Budget surplus amounted to 38% of TNTR, which allowed the Region to increase its account balances significantly.
According to the Region's budget law, this year, TNTR may decline by 37% amid an 11% decline in transfers. Budget expenditures are expected to increase by 20%. In that case, the Region’s budget will be executed with a deficit of 28% of TNTR, which is to be mostly covered by the Region's account balances.
Low debt load; smooth debt repayment schedule. In 2021, the Region’s debt declined by RUB 2.6 bln and, as of January 1, 2022, it stood at RUB 10.9 bln. The decline is explained by repayment of bank loans and some bonds. As of January 1, 2022, the bulk of debt (53%) was made up of budget loans, bonds accounted for another 46% of the debt portfolio, and the remainder included state guarantees issued by the Region.
By March 1, 2022, the Region's debt volume and debt repayment schedule has not changed. The debt repayment schedule is balanced, and there are no periods of significant peak repayments. The Region must repay or refinance 30% of its debt over the next two years and repay RUB 1.6 bln (15% of total debt) by the end of 2022.
The Region participates in the federal infrastructure budget loan program; in 2022 and 2023, it will receive budget loans for RUB 1.6 bln and RUB 1.9 bln, respectively, which will be used to cover a portion of capital expenditures.
At the end of 2021, the ratio of debt to current revenues was 10%. ACRA expects this indicator to grow to 16% by the end of 2022, which, according to the Agency’s methodology, indicates a low debt load.
The ratio of debt to GRP will not exceed 2% in 2022, which is an indication of a low general debt load.
Interest expenses are not burdensome for the Region: averaged interest expenses for 2018−2022 will not exceed 1% of total budget expenditures (excluding subventions).
Account balances are enough to cover future deficits. Since the beginning of 2021, the Region’s account balances exceeded its monthly expenses by more than three times. As of January 1, 2022, the amount of available liquidity exceeded RUB 36 bln, which is enough, in ACRA's opinion, to cover budget deficits and repay debt in 2022–2023.
The Region's budget liquidity ratio will exceed 140% in 2022, which corresponds to a high level of available liquidity as per the Agency's methodology.
As of March 1, 2022, the Region had no overdue accounts payable. The Region holds accumulated liquidity in a single treasury account, which generates interest income.
Moderately diversified economy strongly concentrated around the metals industry. According to ACRA’s estimates, the averaged share of tax revenues from the metals industry was 48% for 2018–2021, which indicates a temporary increase in the dependence of budget revenues on the metals sector in connection with market changes in 2021. NLMK is the Region’s largest taxpayer. ACRA notes the potential risks connected with the dependence on a single taxpayer.
The averaged GRP per capita in the Region amounted to 83% of the national average in 2017–2020. The unemployment rate has not exceeded 4.5% throughout the entire observation period since 2013; in 2021, the rate amounted to 4.2%. In 2018–2021, the averaged monthly wage was more than three times higher than the averaged regional subsistence minimum.
1 Hereinafter, averages are calculated according to the Methodology for Assigning Credit Ratings to Regions and Municipal Entities of the Russian Federation.
KEY ASSUMPTIONS
-
Execution of the budget in line with the current version of the Region’s budget law.
-
Use of free liquidity accumulated in the Region’s accounts to cover expected deficits.
-
Receipt of infrastructure budget loans to finance a portion of future capital expenditures.
POTENTIAL OUTLOOK OR RATING CHANGE FACTORS
The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
-
Improved economic diversification;
-
Value of the operating balance exceeding the volume of current income by more than 20% by late 2022.
A negative rating action may be prompted by:
-
Ratio of debt to current revenues exceeding 30%;
-
Considerable decline in available liquidity amid growing expenditures and declining revenues.
ISSUE RATINGS
Lipetsk Region Government Bond, 35010 (ISIN RU000A0ZZR33), maturity date: October 21, 2025, issue volume: RUB 3 bln — АA(RU).
Lipetsk Region Government Bond, 34011 (ISIN RU000A1013T3), maturity date: November 21, 2024, issue volume: RUB 2.5 bln — АA(RU).
Lipetsk Region Government Bond, 34012 (ISIN RU000A102598), maturity date: September 16, 2025, 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 — AA(RU).
REGULATORY DISCLOSURE
The credit ratings have been assigned to the Lipetsk Region and the bonds issued by the Lipetsk Region (ISIN RU000A0ZZR33, RU000A1013T3, RU000A102598) 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 on the National Scale for the Russian Federation was also applied to assign credit ratings to the above issues.
The credit ratings of the Lipetsk Region and the bonds issued by the Lipetsk Region (ISIN RU000A0ZZR33, RU000A1013T3, RU000A102598) were published by ACRA for the first time on July 7, 2017, October 24, 2018, November 21, 2019, and September 15, 2020, 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 sovereign credit rating revisions and publications.
The credit ratings were assigned based on 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), and ACRA’s own databases. The credit ratings are solicited, and the Administration of the Lipetsk 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 no ancillary services to the Administration of the Lipetsk Region. No conflicts of interest were identified in the course of credit rating assignment.
