The credit rating of the Chelyabinsk Region (hereinafter, the Region) is based on the Region’s moderately low debt load, insignificant liability refinancing risks, and high operating efficiency of the budget coupled with significant flexibility of budget expenditures. The rating is constrained by the considerable dependence of the Region’s tax revenues on its metals industry, as well as by the growing need for additional sources to finance capital expenditures.
The Chelyabinsk Region is part of the Ural Federal District. It is home to 3.4 mln people or about 2.3% of Russia’s population. The Region’s GRP amounted to RUB 2,042 bln in 2021 or about 1.7% of the total GRP of Russia’s regions. According to the Region's estimates, its GRP was RUB 2,128 bln in 2022.
KEY ASSESSMENT FACTORS
High operational efficiency of the budget and a growing need for additional financing. The averaged1 ratio of current account balance to current revenues of the Region in 2020–2024 will amount to 21%. By the end of 2023, the current account balance is expected to be positive, which will allow the Region to finance, without extra funds, about a third of forecasted capital expenditures.
The averaged share of capital expenditures in total expenditures for 2020–2024 will amount to around 37%. On average, the Region finances about three quarters of capital expenditures on its own. The averaged (for the abovementioned period) share of tax and non-tax revenues (TNTR) in the Region’s revenues (excluding subventions) will exceed 82%.
The ratio of the modified budget deficit (MBD) to current revenues for 2019–2023 will amount to -14%, and the MBD is expected to be well below zero in 2023, which is explained by the need to cover the forecasted budget deficit. The Region will have to use most of its accumulated funds and take out budget loans to finance its capital expenditures.
The Region’s 2022 budget was executed with a deficit of 12% of TNTR. About three quarters of the deficit was covered using budget loans, while the rest was covered using account balances.
According to the current version of the Region’s budget law, in 2023, budget revenues will decline by 11% vs. 2022. TNTR will fall by around 8%, including a possible significant decline in personal income tax revenues and revenues from depositing budget funds. Corporate income tax revenues are expected to remain at the 2022 level. Transfers from the federal budget may decline by 23% year-on-year in 2023. Budget spending, on the other hand, will grow by 10% due to current and capital expenditures growing by 8% and 12%, respectively. The Region expects a considerable budget deficit to form by the end of the year at 44% of TNTR and plans to finance around 40% of it using funds held in accounts. The remaining part of the deficit will be covered primarily by using budget loans, however, the Region may also resort to commercial debt.
Over seven months of this year, the Region’s revenues increased by 7% compared to the same period in 2022. TNTR grew by around 13%, including as a result of corporate income tax increasing by 22% and property tax recording 25% growth. Personal income tax revenues grew by around 7%, while transfers from the federal budget fell by just over 12%. Budget expenditures increased by 7% year-on-year, however, an interim surplus was formed that exceeded the figure for the same period last year.
ACRA proceeds from the assumption that the increase in a number of the Region’s tax revenues at the end of this year will partially exceed the indicators approved by the budget law. At the same time, growth of expenditures this year may turn out to be less significant because the growth rate of capital expenditures will decline and these expenditures will be partially financed using budget loans. This year’s budget deficit may be lower than the target and will be covered in almost equal portions by accumulated liquidity and budget loans. If this is the case, the Region will not need to raise commercial debt in 2023.
1Hereinafter, 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 smooth debt repayment schedule. As of the end of 2022, the Region’s debt amounted to RUB 38.7 bln and mainly included budget loans (80%) and bonds (18%). The remainder was government guarantees. The debt repayment schedule specified repayment of 6% of debt this year and 8% in 2024.
As of September 1, 2023, the Region’s debt had increased by 11% compared to the start of the year and amounted to RUB 43.0 bln. Debt grew due to the Region obtaining budget loans worth RUB 4.3 bln (RUB 4.1 bln to finance infrastructure projects, the remainder was budget loans for advanced financing of expenditure commitments). These funds will not have a major impact on the Region’s debt repayment schedule since the repayment of the larger amount extends until 2038, while the smaller amount is planned to be repaid in 2024 using federal budget funds.
As of the end of 2022, the ratio of the Region’s debt to current revenues was 17%. ACRA expects the Region’s debt load to grow in view of the expected obtainment of debt for capital purposes this year. In the Agency’s opinion, the ratio of debt to current revenues may exceed 31%, which will correspond to a moderately low debt load.
The ratio of the Region’s interest expenses to total budget expenditures (excluding subventions) averaged for 2020–2024 will not exceed 1.0%. The ratio of the Region’s debt to projected GRP will be around 3.3% this year.
Account balances will allow the Region to cover part of the budget deficit expected this year. Since the start of 2023, account balances were several times higher, on average, than the Region’s monthly budget expenditures. As of September 1, 2023, the volume of funds had doubled compared to the indicators as of January 1, 2023. In the Agency’s opinion, the volume of accumulated funds allows a significant part of the expected budget deficit to be financed.
As of the end of 2023, the Region’s budget liquidity ratio (excluding funds of autonomous and budgetary institutions) will be about 69%.
Data as of July 1, 2023 shows that the Region had no overdue payables. As of September 1, 2023, there were no open but unused credit lines at banks.
Moderate economic development indicators with a high concentration on the metals industry. According to ACRA’s calculations, about 36% of the Region’s tax revenues may come from the metals sector (share averaged for 2019–2022), however, this share declined significantly in 2022. The largest companies in the Region are MMK PJSC, ChelPipe PJSC, and ChMK PJSC.
In 2018–2021, the Region’s averaged GRP per capita equaled 71% of the national average. The unemployment rate averaged for 2019–2022 amounted to 4.2%; in 2022, it was 3.1%. The ratio of monthly salary to subsistence minimum averaged for the abovementioned period amounted to 3.5.
KEY ASSUMPTIONS
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Significant positive dynamics for corporate income tax revenues and property tax revenues by the end of 2023;
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Slower growth of capital expenditures relative to the target;
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Current expenditures growing in line with expected inflation in 2024;
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Use of free liquidity accumulated in the Region’s accounts to cover a portion of budget deficits expected this year;
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No need to resort to commercial debt in 2023;
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Obtainment of infrastructure budget loans to finance a portion of capital expenditures in the forecast period.
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:
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Declining need of the Region’s budget for additional sources of funds for capital purposes;
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Growing volume of accumulated liquidity this year.
A negative rating action may be prompted by:
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Growing concentration of the Region’s economy on the metals sector;
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Lower operational efficiency of the budget;
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Further growth of the budget’s need for additional funding and significant decline in available liquidity;
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Significant increase in the volume of short-term commercial debt.
ISSUE RATINGS
Chelyabinsk Region, 35001 (ISIN RU000A102FV5), maturity date: November 30, 2027, issue volume: RUB 7 bln — AA(RU).
Chelyabinsk Region, 35002 (ISIN RU000A102L61), maturity date: December 17, 2027, issue volume: RUB 8 bln — AA(RU).
Chelyabinsk Region, 35003 (ISIN RU000A102L79), maturity date: December 17, 2027, issue volume: RUB 8 bln — AA(RU).
Rationale. In the Agency’s opinion, the bonds of the Chelyabinsk Region are senior unsecured debt instruments, the credit ratings of which correspond to the credit rating of the Chelyabinsk Region.
REGULATORY DISCLOSURE
The credit ratings of the Chelyabinsk Region and the bond issues of the Chelyabinsk Region (ISIN RU000A102FV5, RU000A102L61, RU000A102L79) have been assigned 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 ratings of the Chelyabinsk Region and the bond issues of the Chelyabinsk Region (ISIN RU000A102FV5, RU000A102L61, RU000A102L79) were published by ACRA for the first time on December 26, 2017, December 1, 2020, December 21, 2020, and December 21, 2020, respectively. The credit rating and its outlook, as well as the credit ratings of the government securities of the Chelyabinsk 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 Chelyabinsk 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 Chelyabinsk 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 additional services to the Government of the Chelyabinsk Region. No conflicts of interest were discovered in the course of credit rating assignment.
