The change in the outlook for the credit rating of the Lipetsk Region (hereinafter, the Region) to Negative is due to ACRA’s expectations regarding a widening gap between the dynamics of the Region’s per capita gross regional product (GRP) and the national average, which may lead to a downgrade of the economic profile of the Region.
The Region’s credit rating is based on its low debt load, minimal risks for refinancing liabilities, growing amount of available liquidity, and positive operational efficiency of the budget. The rating is constrained by the budget’s dependence on the largest taxpayer, the volatile structure of tax revenues, and the budget’s moderate need to use accumulated funds to financial capital expenditures.
The Region is part of the Central Federal District and is home to 1.1 mln people (around 0.8% of the country’s population). In 2021, the Region’s GRP amounted to RUB 844 bln (around 0.7% of the total GRP of Russia’s regions). According to the Region’s estimates, its GRP may have reached RUB 775 bln in 2022 and RUB 850 bln in 2023.
KEY ASSESSMENT FACTORS
Significant dependence of the Region’s economy on the metals industry. According to the Agency’s calculations, the metals industry generated more than 40% of tax revenues in 2023, and the averaged1 share of tax revenues from this sector for 2020–2023 was also about 40%. The largest contribution to the volume of tax revenues came from the production of cold-rolled steel sheets (around 39% at the end of 2023), about 10% at the end of last year was provided by the wholesale and retail trade industries. The share of revenues from the public sector of the economy is small and amounted to around 10% in 2023. NLMK is the Region’s largest taxpayer. ACRA notes the potential risks connected with the dependence of the economy and the budget on the largest taxpayer.
In 2022, the total per capita GRP of Russia’s regions increased by 16%, while in the Region this indicator decreased by 6%. In 2019–2022, the averaged GRP per capita in the Region was 79% of the national average. ACRA has applied a positive borderline adjustment to this indicator, since the decrease in per capita GRP in 2022 could be temporary. According to the current version of the Region’s socioeconomic development forecast, the deflator index and the physical volume index of GRP significantly exceed 100% in 2023 (105.1% and 104.4%, respectively), which may have a positive impact on the GRP indicator at the end of 2023. If the negative trend of lagging behind the national average growth rate of per capita GRP continues, the assessed category of this indicator may decrease, which will lead to a decrease in the overall assessment of the Region’s economic profile.
The unemployment rate has not exceeded 4.3% throughout the entire observation period since 2013. The indicator was 2.7% from October to December 2023. The ratio of the averaged monthly wage to the regional subsistence minimum exceeded 3.5 from 2020 to 2023.
1 Hereinafter, averages are calculated according to the Methodology for Assigning Credit Ratings to Regions and Municipal Entities of the Russian Federation.
Positive operational efficiency of the budget and moderate need to use accumulated funds. The ratio of the current account balance to current revenues averaged for 2020–2024 will be 14%. The current account balance for 2023 was well above zero, which not only indicates that the Region’s current revenues are sufficient to cover current expenditures, but also to finance a significant share of its capital expenditures. The current account balance may turn negative by the end of 2024 due to the large planned budget deficit, however, the averaged value of this indicator will remain moderately high.
The averaged share of capital expenditures in total expenditures for 2020–2024 will be around 25%. The flexibility of budget expenditures is moderately high, since on average over the past four years capital expenditures have been approximately 40% financed using transfers from the federal budget.
The averaged share of tax and non-tax revenues (TNTR) in the Region’s revenues (excluding subventions) for the aforementioned period will amount to 80%.
The averaged ratio of the modified budget deficit to current expenditures for 2020–2024 will be just below zero, which indicates a moderate need to use accumulated liquidity to cover capital expenditures. In the Agency’s opinion, the Region will not need to resort to commercial loans this year for capital purposes.
The assessment of the budget profile is determined as moderately strong and is limited by noticeable deviations of the Region’s actual own budget revenues from targets. Budget forecasting is often conservative and partly complicated because a significant portion of revenues comes from highly volatile industries. There are no cases of violation of budget legislation.
The revenue side of the Region’s budget increased by 24% in 2023 compared to 2022. TNTR grew by 28%, largely due to a significant increase in corporate income tax revenues (+65% year-on-year), which is explained mainly by the cancellation of the institution of a consolidated group of taxpayers. More modest, but at the same time significant growth was recorded by personal income tax revenues (+13%) and revenues from taxes on goods and services (+16%). A considerable share of TNTR — 5% — was formed by interest income from placing temporarily free budget funds. The volume of transfers increased by 9% over the year, with capital transfers growing by a third. The Region’s budget expenditures increased by 9% vs. 2022, including capital expenditures growing by around 13%. The Region’s budget was executed with a surplus of 10% of TNTR in 2023, which enabled the Region to considerably increase the size of its account balances.
According to the current version of the budget law, revenues this year will decline by 10% compared to last year. TNTR is expected to decline by 14%, largely on the back of corporate income tax proceeds falling by 18% year-on-year. Transfers from the federal budget will increase by no more than 5% compared to 2023, however, capital transfers will increase by approximately 20%. It is expected that the expenditure side of the Region’s budget will grow by 21%, with the largest increase in nominal terms coming from current expenditures. The significant planned budget deficit at 32% of TNTR will be fully financed by funds held in the Region’s accounts.
Low debt load and minimal debt refinancing risks. As of January 1, 2024, the Region’s debt was RUB 16.6 bln, which is 25% higher than the indicator for 2022. Growth of debt is due to the Region receiving budget loans from the federal budget. In 2023, the Region received RUB 1.4 bln of budget loans to carry out infrastructure projects, RUB 1.7 bln of special treasury loans and around RUB 2.0 bln of budget loans for advanced financing of expenditure obligations. Along with this, the planned repayment of the par value of regional bonds in the amount of RUB 1.3 bln was carried out. As of the beginning of this year, 86% of the debt was represented by budget loans, the remainder was formed by the Region’s bonds. The debt repayment schedule was smooth as of the aforementioned date, and, according to the Agency, the risks of refinancing obligations are minimal for the Region because the volume of accumulated liquidity significantly exceeds the entire volume of the Region’s debt. The short-term debt volume was 23% as of the start of this year. More than half of this was budget loans for advanced financing of expenditure obligations, which are planned to be covered in 2024 using interbudgetary transfers from the federal budget. As of the start of this year, 17% of debt obligations were subject to repayment in 2025.
The Region’s ratio of debt to current revenues was 16% at the end of 2023. ACRA expects this indicator to remain largely unchanged by the end of 2024 and correspond to a low debt load. The ratio of averaged interest expenses to total expenditures (excluding subventions) for 2020–2024 will be less than 1%. The ratio of the Region’s debt to GRP projected for the current year will not exceed 2%.
The Region’s debt profile is assessed as very strong. ACRA takes into account the significant share of budget loans in the structure of the debt portfolio and the weighted average debt repayment period, which is well over 3.5 years. There are no cases of the Region failing to fulfil its debt obligations. The budget’s operational efficiency in the analyzed period is mainly positive, which indicates that current expenditures are financed using current revenues and without resorting to borrowed funds. The debt load of the Region’s municipalities is low and gradually declining; the ratio of total debt of the municipalities to their total TNTR was 13% as of the end of 2023. According to the Region, the financial debt of public sector companies was around RUB 0.3 bln as of October 1, 2023, with another RUB 0.2 bln accounting for overdue accounts payable of public sector entities. In ACRA’s opinion, this volume of debt does not bear risks for the Region’s budget.
Account balances are sufficient to finance the entire planned budget deficit. As of the end of 2023, the volume of balances in the Region’s account increased by more than 1.5 times. Most of the increase was due to the budget surplus at the end of the year. Since the beginning of 2023, account balances have exceeded the Region’s monthly expenses by several times. The size of accumulated funds allows the expected budget deficit for 2024 to be covered without resorting to borrowing and enables the Region to carry out planned debt repayments this year.
The Region’s budget liquidity ratio will exceed 140% for 2024.
The budget liquidity profile is assessed as strong. Currently, the Region does not need to use credit lines or attract a short-term loan from the Federal Treasury Department to finance possible cash gaps. Accumulated liquidity is several times greater than the volume of the Region’s debt; this volume is sufficient to finance possible budget needs. There were no overdue accounts payable of the regional budget as of October 1, 2023.
key assumptions
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Budget execution in line with the current version of the Region’s budget law;
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Use of free liquidity in the Region’s accounts to cover the expected budget deficit.
POTENTIAL OUTLOOK OR RATING CHANGE FACTORS
The Negative outlook assumes that the rating will highly likely be downgraded within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- Lower concentration of the economy on the metals industry.
A negative rating action may be prompted by:
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Lower growth rate of GRP compared to the national average;
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Considerable decline in the budget’s operational efficiency;
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Substantial decline in the volume of the Region’s accumulated liquidity.
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 bond issues (ISIN RU000A0ZZR33, RU000A1013T3, RU000A102598) of the Lipetsk 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 ratings of the Lipetsk Region and the bond issues (ISIN RU000A0ZZR33, RU000A1013T3, RU000A102598) of the Lipetsk Region 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 government securities of 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 Government of the Lipetsk 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 Lipetsk Region. No conflicts of interest were discovered in the course of credit rating assignment.
