The credit rating assigned to the Sverdlovsk Region (hereinafter, the Region) stems from the developed industrial base of the regional economy, growing flexibility of budget expenditures, declining but still high debt burden and sufficient liquidity.
The Sverdlovsk Region is a part of the Urals Federal District, bordering seven other administrative entities of the Russian Federation. The Region’s population is about 4.3 million people (2.95% of the total population of the Russian Federation, the 5th place in the Russian Federation). In 2015, the regional GRP amounted to RUB 1.8 trillion (2.7% of the total GRP of the regions of the Russian Federation, the 6th place in the Russian Federation). The backbone of the regional economy is manufacturing sector (30.5% of GRP in 2016), in particular mechanical engineering, ferrous and non-ferrous metallurgy.
Key rating assessment factors
Well-developed regional economy, the backbone of which is mechanical engineering and metals industry. The regional metals and mechanical engineering industries are supported by the defense contracts and large infrastructure projects financed by the federal budget. In 2016, the industrial production index of the Region was 107.7% compared to that of 2015 (or 101.1% against national average). In 2017–2019, new metal production and mechanical engineering facilities are expected to be commissioned, which will further boost the manufacturing potential of the Region. At the same time, per capita incomes and unemployment trends show a strong dependence on the investment demand sectors most affected by the 2014–2015 economic crisis, as the unemployment rate significantly exceeded the national average, reaching a maximum of 117% of the national average in 2014–2015, and the per capita income decreased from 120% in 2013 to 114% in 2016 against the national average.
Improving budget discipline and growing budget resistivity to economic shocks. The Region’s budget is under pressure of a high share of compulsory expenditures (on average 78% in 2014-2017), substantial relying on own resources (as the share of own revenues has grown from 91% in 2014 to 95% in 2017). In addition, increasing operating balance (from 10% in 2014 to 18% in 2017) indicates to a growing capacity to absorb negative external effects on the budget revenues, through a stricter control over expenditures. The Capex share has remained stable over 2014-2017.
Declining but still high debt burden, with a substantial part of the debt portfolio being refinanced. The debt service costs are below 20% of the operating balance sheet. The Region has not violated its covenants under budgetary loans, therefore, there have been no cases of forced early debt repayments. A substantial part of the debt portfolio (58%) is expected to be repaid or refinanced in the next 30 months. To refinance the debt, the Region plans to issue 8-year bonds, which will be positive for the maturity profile of its debt portfolio. According to ACRA estimates, the Region’s debt service costs will grow by 18.5% in 2017 against 2016. The 2018 debt service costs are estimated at the level approved in 2017.
Sufficient budget liquidity amid declining annual turnover of short-term financing. The Region’s need to attract treasury loans and short-term bank funding has declined over the past three years. The current budget liquidity is characterized as sufficient. The Region places deposits, and, according to ACRA estimate, the annual need for short-term funding does not exceed RUB 10 billion, which turnover rate is up to four times a year.
Key assumptions
- Annual growth rate of the regional economy at about 5% in 2017–2019;
- Control over mandatory expenses, and budget deficit of not more than 7% of budget revenues;
- Growing share of market debt within the debt portfolio;
- Total amount of short-term treasury loans not more than RUB 40 billion a year;
- Capital expenses not lower than 12% of the total expenditures.
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:
- Lower unemployment; per capita income higher than the national average;
- Lower budget deficit and debt burden;
- Share of capital expenses above 15%.
A negative rating action may be prompted by:
- Higher debt burden;
- 3%+ decline in tax and non-tax incomes against 2016 amid mandatory expenditures remaining at the current level;
- 5%+ growth of mandatory budget expenditures against 2016.
Issue ratings
None.
Rating history
None.
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.
A credit rating has been assigned to the Volgograd Region for the first time. The credit rating and its outlook are expected to be revised within 182 days following the rating action (September 6, 2017).
The assigned credit rating is based on the data provided by the Sverdlovsk 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 Sverdlovsk Region participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by the Sverdlovsk Region in its financial report have been discovered.
ACRA provided no additional services to the Sverdlovsk Region. No conflicts of interest were discovered in the course of credit rating assignment.
