The positive outlook for the credit rating of the Sverdlovsk Region (hereinafter, the Region) stems from the projected stabilization of the debt load at below 30% and the expected maintenance of high budget liquidity.
The Region’s credit rating is supported by the balanced indicators of the budget profile and low debt refinancing risks. The Region’s socioeconomic development indicators are moderate and partially depend on the local metals industry.
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 4.23 mln (3% of Russia’s population). The Region’s gross regional product (GRP) amounted to RUB 3.5 tln in 2022 (the Region’s GRP is consistently around 3% of the total GRP generated by Russia’s regions).
KEY ASSESSMENT FACTORS
High budget self-sufficiency and flexibility of budget expenditures. In 2023, the Region’s budget revenues increased by 20% compared to 2022, and expenses grew by 6%. The surplus at the end of the year amounted to 13% of tax and non-tax revenues (TNTR); the main increase in revenues came from corporate income tax. In the first quarter of this year, corporate income tax revenues decreased by 10% compared to the same period in 2023. Budget execution at the end of the year is planned with a deficit of about 5%, and it will be financed mainly from funds in the Region’s accounts.
The averaged1 ratio of the balance of current operations to current revenues of the Region for 2020–2024 will be 19%. The forecasted current account balance will be 12% of the Region’s current revenues in 2024, which is two times lower than last year’s indicator; the reduction will occur due to a planned increase in current expenses by more than 15%. Nevertheless, positive operational efficiency indicates that current revenues are sufficient to cover all current and part of the Region’s capital expenditures.
The averaged share of capital expenditures in the Region’s total expenditures for 2020–2024 will amount to around 23%, which corresponds to the highest level of flexibility of budget expenditures. Capital expenditures are almost three-quarters funded by the Region independently.
The averaged share of TNTR in the Region’s revenues (excluding subventions) will be 88% in the aforementioned period.
In the Agency’s opinion, the ratio of the modified budget deficit to current revenues averaged over 2020–2024 may be just below zero.
The volume of tax preferences in 2022–2023 exceeds 5% of TNTR, the main share being stimulus (investment) tax benefits. No violations of budget legislation were identified. The Region is replacing subsidies from the regional budget to equalize the budgetary provision of municipal districts (urban districts) with additional standards for deductions from personal income tax. The Region’s budget is reviewed on average once or twice a year; significant deviations from the plan (if any) are explained mainly by market conditions. The quality assessment of the budget profile is moderately strong.
1 Hereinafter, averages are calculated according to the Methodology for Assigning Credit Ratings to Regions and Municipal Entities of the Russian Federation.
Low debt load and insignificant short-term debt refinancing risks. As of January 1, 2024, the Region’s debt load amounted to 26% of its current revenues. As of that date, the debt was two-thirds made up of budget loans, while the remainder was bonds. As of April 1, 2024, the size and structure of the debt was practically unchanged. In 2022–2023, the Region received two infrastructure budget loans in a series of tranches to a total of almost RUB 11 bln at a 3% annual interest rate, while in 2021–2022 it obtained loans to replace commercial debt (around RUB 20 bln at 0.1%), and in 2023, loans were received for financial support for the implementation of measures approved by the Government Commission for Regional Development (RUB 7.75 bln at 3%). In addition, the debt includes a loan that was provided to the Region in 2020 to repay budget loans, which in turn were granted to replenish the account balances of the budgets of the regions of the Russian Federation (RUB 13.66 bln at 0.1%). A loan for advanced financing of expenditure obligations in the amount of RUB 3.2 bln was due for repayment on April 27, 2024. ACRA expects that the Region’s debt load may grow slightly by the end of 2024 (due to lower current revenues). At the same time, maintaining the debt burden below 30% of current revenues at the end of 2024 and the absence of debt growth in the forecast period may lead to the Region’s credit rating being upgraded.
The Region’s debt repayment schedule is balanced and does not include any large peak repayment periods. As of January 1, 2024, the Region had to repay or refinance 16% of its debt by the end of the year (60% of this amount comes from advance financing loans maturing at the end of April), and 20% of its debt in 2025. All liabilities to be repaid in 2024 and 2025 are covered by funds held in the Region’s accounts.
Interest expenses are not burdensome for the Region — interest expenses averaged for 2020–2024 will amount to 1% of total budget expenditures (excluding subventions).
The ratio of debt to GRP annually does not exceed 4%, which corresponds to a low total debt load as per ACRA’s methodology.
The debt of public sector companies as of the start of the year did not exceed RUB 10.5 bln (the main debtors were Titanovaya Dolina Special Economic Zone JSC, Food Market Development Agency JSC, and housing and utilities companies); overdue payables of public sector companies amounted to RUB 0.5 bln. There is no information about significant volumes of commercial liabilities of the Region that could influence its creditworthiness. The Region has entered into 10 concession agreements that are to be implemented by 2032; RUB 3.2 bln is planned to be spent on these agreements in 2024. Nine municipal concessions are provided with subsidies from the regional budget. The Region’s current account balance is consistently positive, the structure of debt is diversified. The average debt repayment period (as of the start of 2024) exceeded four years. The Region has a good credit history.
The debt load of municipal entities is low and continues to decline. The ratio of the total debt of these entities to total TNTR declined from 13% in 2016 to 3% in 2023. The absolute value of debt declined in the indicated period from RUB 6.5 bln to RUB 2.6 bln. The largest borrowers are the Kamensk-Uralsky urban district, Nizhny Tagil, and the Serov urban district. The Region’s debt profile is considered strong based on the sum of all the above factors.
High volume of available liquidity. In 2023, the Region’s account balances (including funds of autonomous and budgetary institutions, as well as funds of organizations that are not part of the budget process) on average exceeded monthly budget expenditures by two times. At the same time, the monthly volume of the regional budget’s internal funds amounts to a much smaller value. The Region deposits its accumulated liquidity with banks, which allows it to receive interest income.
In view of the expected deficit in 2024, the ratio of the Region’s budget liquidity will be 231%, which corresponds to a high level as per the Agency’s methodology.
As of January 1, 2023 and January 1, 2024, the Region did not have any overdue payables. In 2023, the Region obtained a loan from the Federal Treasury Department (FTD) for advance financing of expenditures; loans were not obtained to finance cash gaps. The Region has not entered into any agreements with the FTD in 2024. Debt refinancing risks are insignificant.
Failed purchases of credit lines in 2022 were due to the lack of applications from credit institutions. The Region has no open but unused bank limits. The liquidity profile is assessed as moderately strong.
Diversified economy with moderate concentration on the metals industry. The Region’s GRP per capita averaged for 2019–2022 amounted to 86% of the national average. The ratio of wage to regional subsistence minimum averaged for 2020–2023 was 4. At the end of 2023, the unemployment rate averaged over the last four years calculated according to the ILO’s methodology amounted to 2.4%.
The backbone of the regional economy is the manufacturing sector with moderate concentration on the metals industry. According to ACRA’s estimates, the contribution of the metal production industry to the Region’s tax revenues averaged for 2020–2023 exceeded 20%. In 2023, six of the ten largest organizations in the Region (in terms of revenues) were related to the metals industry.
KEY ASSUMPTIONS
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Execution of the 2024 budget with a deficit of around 5% of TNTR;
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Maintaining a significant share of accumulated liquidity;
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Low growth of debt load.
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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Stable growth of the share of internal funds in the budget’s revenue structure to 90% or more;
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The Region’s debt load consistently below 30% of its current revenues.
A negative rating action may be prompted by:
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Considerable growth of the budget’s need for debt financing;
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Significant growth of the short-term portion of debt;
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Significantly lower volume of available liquidity and higher budget expenditures.
issue ratings
Sverdlovsk Region, 35003 (ISIN RU000A0JWZ77), maturity date: November 15, 2024, issue volume: RUB 5 bln — АA-(RU).
Sverdlovsk Region, 35004 (ISIN RU000A0ZYDU3), maturity date: October 22, 2025, issue volume: RUB 10 bln — АA-(RU).
Sverdlovsk Region, 35005 (ISIN RU000A0ZZQH9), maturity date: October 23, 2026, issue volume: RUB 5 bln — АA-(RU).
Sverdlovsk Region, 35006 (ISIN RU000A1016N9), maturity date: December 15, 2026, issue volume: RUB 5 bln — АA-(RU).
Sverdlovsk Region, 34007 (ISIN RU000A101UG7), maturity date: June 28, 2025, issue volume: RUB 10 bln — АA-(RU).
Sverdlovsk Region, 35008 (ISIN RU000A101Z17), maturity date: July 29, 2027, issue volume: RUB 12 bln — АA-(RU).
Sverdlovsk Region, 35009 (ISIN RU000A102CT6), maturity date: November 17, 2027, volume: RUB 8 bln — АA-(RU).
Sverdlovsk Region, 34010 (ISIN RU000A102DQ0), maturity date: November 23, 2024, volume: RUB 10 bln — АA-(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) 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 ratings of the Sverdlovsk Region and the government securities (ISIN RU000A0JWZ77, RU000A0ZYDU3, RU000A0ZZQH9, RU000A1016N9, RU000A101UG7, RU000A101Z17, RU000A102CT6, RU000A102DQ0) 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, and November 20, 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.
