The credit rating of the Sverdlovsk Region (hereinafter, the Region) is based on the Region’s moderately low debt load, low refinancing risks, and well-balanced operational indicators of the budget profile. The rating is limited by the budget’s growing need for borrowed funds which may be caused by the anticipated budget deficit this year. The Region’s socio-economic development indicators are moderate and partially depend on the local metal industry.
The Positive outlook stems from the possible increase of the volume of available liquidity in the Region’s accounts as of the end of the year and a change to the liquidity ratio assessment.
The Sverdlovsk Region is part of the Ural Federal District and borders seven other regions of the Russian Federation. The Region’s population is about 4.3 mln (3% of Russia’s population). The Region’s gross regional product (GRP) amounted to RUB 2.5 tln in 2020. According to the Region’s Government, in 2021 GRP amounted to RUB 2.95 tln (the Region’s GRP is consistently around 3% of the total GRP generated by Russia’s regions).
key assessment factors
Balanced budgetary indicators and a growing need to use borrowed funds. The averaged1 ratio of the balance of current operations to current revenues of the Region for 2019–2023 will be 16%. The balance of current operations is expected to be positive in 2022 and 2023. This indicates that current revenues are sufficient to cover all current and some capital expenditures.
The averaged share of capital expenditures in the Region’s total expenditures for 2019–2023 will exceed 22%, which corresponds to the highest level of flexibility of budget expenditures as per ACRA’s methodology. Capital expenditures are mostly independently funded by the Region.
The averaged share of tax and non-tax revenues (TNTR) in the Region’s revenues (excluding subventions) will amount to 85% in the aforementioned period.
In the Agency’s opinion, the ratio of the modified budget deficit to current revenues averaged over 2019–2023 may be around -3%. This is largely due to the projected budget deficit in 2022.
The Region’s budget law assumes significant growth of TNTR and income tax. However, based on the Region’s expectations, this year the volume of TNTR will remain approximately at the level of 2021. ACRA expects income tax receipts to decrease slightly at the same time.
Although income tax proceeds have declined by 13% over ten months of this year, TNTR has grown by 6% due to higher personal income tax and total income tax proceeds.
It is expected that the expenditure side of the Region’s budget could increase by more than 8% compared to 2021, and the budget will be executed with a deficit of 4% of TNTR. Most of the expected deficit will be covered using borrowings (budget loans).
1 Hereinafter, averages are calculated according to the Methodology for Assigning Credit Ratings to Regions and Municipal Entities of the Russian Federation.
Moderately low debt load and insignificant debt refinancing risks in the short term. As of November 1, 2022, the Region’s debt had grown somewhat compared to the start of the year and amounted to RUB 111.3 bln. Half of the debt is bonds, while the other half is budget loans. In 2022, the Region received a RUB 5.1 bln infrastructure budget loan in several tranches, as well as a RUB 7.9 bln loan to replace its commercial debt. As of the date of analysis, the Region’s annual repayment of its debt did not exceed 19%. This year, the Region will be relieved from its obligations to repay budget loans due in 2022.
At the end of 2021, the ratio of the Region’s debt to current revenues was 30%. ACRA expects this ratio to steadily grow to 33% by the end of 2022 and then to 38% in 2023, which, as per the Agency’s methodology, also corresponds to a moderately low debt load. This year’s growth in the debt load was caused by both a decline in the Region’s current revenues and expected growth in absolute debt due to the financing of the projected deficit.
Interest expenses are not burdensome for the Region: interest expenses averaged for 2019–2023 will not exceed 2% of total budget expenditures (excluding subventions).
The ratio of debt to GRP does not exceed 4%, which corresponds to a low debt load as per ACRA’s methodology.
Growing volume of available liquidity which may be used to finance future deficits. The volume of liquid funds available to the Region has grown substantially since the beginning of 2022. At the same time, the current estimated liquidity ratio does not take into account intra-annual growth and will be about 30% at the end of this year. However, growth of account balances, which, among other things, is due to the execution of the budget with an intermediate surplus, allows us to expect that there will be a significant volume of liquid funds at the end of the year and a higher ratio.
The Region had no overdue payables as of October 1, 2022. The Region deposits its accumulated liquidity with banks, which allows it to receive interest income. This year, the Region has not borrowed any loans from the Federal Treasury Department, however, a contract has already been signed.
Diversified economy with moderate concentration on the metal industry. The Region’s GRP per capita averaged for 2017–2020 consistently exceeded 90% of the national average. The ratio of wage to regional subsistence minimum averaged for 2018–2021 was 3.9.
At the end of 2021, the unemployment rate averaged over the last four years calculated according to the ILO’s methodology amounted to 4.6%.
The backbone of the regional economy is the manufacturing sector with moderate concentration on the metal industry. According to ACRA’s estimates, the contribution of the metal production industry to the Region’s tax revenues averaged for 2018–2021 amounted to 22.4%. In 2021, eight of the ten largest organizations in the Region (in terms of revenues) were related to the metal industry.
key assumptions
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Budget execution in 2022 as projected by the Region;
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Financing the budget deficit mostly using borrowed funds;
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Absolute debt growing by no more than 10% in 2022 compared to 2021.
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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Significant growth of account balances by the end of the year;
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The Region’s debt load declining stably below 30% of its current revenues;
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Reduced need for additional financing for capital purposes.
A negative rating action may be prompted by:
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Further growth of the budget’s need for debt financing;
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2022 budget deficit far exceeding the Region’s projection;
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Significant growth of the short-term portion of debt;
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Significantly lower volume of available liquidity (including funds of autonomous and budgetary institutions) and higher budget expenditures.
issue ratings
Sverdlovsk Region, 35003 (ISIN RU000A0JWZ77), maturity date: November 15, 2024, issue volume: RUB 5 bln — А+(RU).
Sverdlovsk Region, 35004 (ISIN RU000A0ZYDU3), maturity date: October 22, 2025, issue volume: RUB 10 bln — А+(RU).
Sverdlovsk Region, 35005 (ISIN RU000A0ZZQH9), maturity date: October 23, 2026, issue volume: RUB 5 bln — А+(RU).
Sverdlovsk Region, 35006 (ISIN RU000A1016N9), maturity date: December 15, 2026, issue volume: RUB 5 bln — А+(RU).
Sverdlovsk Region, 34007 (ISIN RU000A101UG7), maturity date: June 28, 2025, issue volume: RUB 10 bln — А+(RU).
Sverdlovsk Region, 35008 (ISIN RU000A101Z17), maturity date: July 29, 2027, issue volume: RUB 12 bln — А+(RU).
Sverdlovsk Region, 35009 (ISIN RU000A102CT6), maturity date: November 17, 2027, volume: RUB 8 bln — А+(RU).
Sverdlovsk Region, 34010 (ISIN RU000A102DQ0), maturity date: November 23, 2024, volume: RUB 10 bln — А+(RU).
Sverdlovsk Region, 35011 (ISIN RU000A102HF4), maturity date: December 16, 2023, volume: RUB 10 bln — А+(RU).
Rationale. In ACRA’s opinion, the bonds of the Sverdlovsk Region are senior unsecured debt instruments, the credit ratings of which correspond to the credit rating of the Sverdlovsk Region.
REGULATORY DISCLOSURE
The credit ratings have been assigned to the Sverdlovsk Region and the bond issues (ISIN RU000A0JWZ77, RU000A0ZYDU3, RU000A0ZZQH9, RU000A1016N9, RU000A101UG7, RU000A101Z17, RU000A102CT6, RU000A102DQ0, RU000A102HF4) of the Sverdlovsk Region 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 Financial Instruments under the National Scale for the Russian Federation was also applied to assign credit ratings to the above issues.
The credit rating of the Sverdlovsk Region and the credit ratings of the government securities (ISIN RU000A0JWZ77, RU000A0ZYDU3, RU000A0ZZQH9, RU000A1016N9, RU000A101UG7, RU000A101Z17, RU000A102CT6, RU000A102DQ0, RU000A102HF4) of the Sverdlovsk Region were published by ACRA for the first time on September 8, 2017, October 24, 2017, October 24, 2017, October 18, 2018, December 11, 2019, June 29, 2020, July 24, 2020, November 18, 2020, November 20, 2020, and December 11, 2020, respectively.
The credit rating of the Sverdlovsk Region and its outlook, as well as the credit ratings of the government securities of the Sverdlovsk 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 Sverdlovsk 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 Government of the Sverdlovsk Region 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 Government of the Sverdlovsk Region. No conflicts of interest were discovered in the course of credit rating assignment.
