The credit rating of Nizhny Novgorod (hereinafter, Nizhny Novgorod, or the City) is based on the City’s relatively high economic development indicators, a high share of tax and non-tax revenues (TNTR) in the budget (excluding the current year), and a high share of capital expenditures, which, however, do not indicate that the spending side of the budget is flexible. The moderate level of budget liquidity limits the City’s credit rating.
The Positive outlook reflects a loan granted to the City from the regional budget to repay the City's market debt. By the end of the year, the City is expected to reduce the share of its short-term debt so that the repayment schedule of this debt will not include any substantial repayments within a year and the refinancing risks will decline significantly.
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 mln. Nizhny Novgorod is a major transportation hub of the VFD and one of Russia’s largest industrial centers.
KEY ASSESSMENT FACTORS
Substitution of short-term debt with long-term budget loans. The City’s debt load expected at the end of this year will be around 43% of current revenues (no more than 80% of TNTR). The substantial difference between these indicators is due to a large amount of revenues represented by transfers, which is typical of budgets of municipal entities (MEs). The City was provided with a budget loan to repay its market debt of RUB 7.1 bln. As a result, as of August 1, 2022, 86% of the debt consisted of budget loans. The region will additionally allocate a tranche of RUB 625 bln to repay a portion of the commercial debt. At the same time, the City expects that the need to attract commercial debt at the end of this year will amount to about RUB 2.3 bln. Thus, ACRA assumes that by the end of this year, the share of short-term debt may be below 20%. Given the term of the budget loans provided (they fall due in 2025–2027), this debt structure is expected to be sustainable. The substitution of short-term debt with long-term debt has a positive impact on the credit quality of the City.
Interest expenses are not burdensome — annual payments are at or below 4% of expenditures, excluding subventions.
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 may be much lower than 20%.
To acquire public transit vehicles, Nizhny Novgorod usually enters into lease agreements, which can be viewed as 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 takes out loans from the FTD. In addition, Nizhny Novgorod uses funds from municipal organizations. The City has a certain volume of undrawn credit limits that do not exceed, or in some cases just exceed, 365 days.
At the end of the year, the estimated liquidity ratio of the municipal budget will amount to less than 10%.
Comparatively high self-sufficiency and limited flexibility of the municipal budget due to the high share of capital expenditures funded by the regional budget. The City expects TNTR to grow by 6% this year, including 6% growth of personal income tax, 12% growth of total income tax, and 20% growth of property taxes (due to an increase in the tax base). Transfers will grow by up to 67%, including a 153% (or RUB 18 bln) increase in subsidies from the regional budget. Most of these funds are used to build the metro system, as well as other construction and improvement projects. Therefore, capital transfers are expected to grow substantially (by 140%) in 2022.
The City’s expenditures will grow by almost half in 2022. The highest growth is expected in the Transportation subsection of the National Economy section, which is a direct reflection of the increase in subsidies from the regional budget for these purposes. Expenditure on housing and public utilities, education, and environmental protection will also grow considerably.
The averaged1 ratio of the current operations balance to current revenues for 2019–2023 will amount to 15.1%. The City’s balance of current operations is positive over the entire period under review.
The averaged share of TNTR (excluding subventions) for 2019–2023 will equal 49.6%. The relative decrease of the indicator is significantly affected by the growth of subsidies this year. ACRA assumes that when the construction of the metro is completed, the share of TNTR will return to approximately 60%, and therefore has adjusted this figure.
The averaged ratio of capital expenditures to total expenditures is very high and considerably exceeds the maximum assessment. However, capital expenditures are mostly backed by transfers.
The ratio of the averaged modified budget deficit to averaged current revenues is negative.
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 organizations in the City is 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. 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 gross regional product of the Nizhny Novgorod Region is about 77–78% of the national average.
Based on the latest statistics, the volume of shipped goods and work and services provided by large and medium-sized enterprises in January to March 2022 increased by 18.6%. This indicator in the Manufacturing Industries segment (for large and medium-sized enterprises) grew by 22.8% in the aforementioned period. The production of motor vehicles, trailers and semi-trailers forms up to a third of shipped goods; transportation and storage is the second most important industry.
1 Hereinafter, averages are calculated according to the Methodology for Assigning Credit Ratings to Regions and Municipal Entities of the Russian Federation.
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 a 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;
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Maintaining a high share of TNTR in budget revenues after major infrastructure projects are completed.
POTENTIAL OUTLOOK OR RATING CHANGE FACTORS
The Positive outlook assumes that the rating will highly likely be upgraded within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Maintaining the share of debt due this year or next year below 20%;
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Significant growth of budget liquidity;
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Growth of the City’s revenues outpacing 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 of internal revenues;
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Changes to regional laws, which increase the share of personal income tax revenues and the portion of total income tax revenues transferred to the Nizhny Novgorod Region;
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Growth of the City’s current budget expenditures that is not supported by growth of 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 — A-(RU).
REGULATORY DISCLOSURE
The credit ratings have been 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 ratings of Nizhny Novgorod and the bond issued by Nizhny Novgorod have been revised and published earlier than the dates specified in the Calendar of sovereign credit rating revisions and publications due to early performance of procedures for reviewing and agreeing the information disclosed with the rated entity. The planned revision date was August 9, 2022, the new revision date is August 4, 2022. The planned disclosure date was August 12, 2022, the new disclosure date is August 9, 2022.
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), and 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 were, 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 discovered in the course of credit rating assignment.
