ACRA assigns AA-(RU) to the Chelyabinsk Region, outlook Stable

The credit rating was assigned to the Chelyabinsk Region (hereinafter, the Region) based on the minimum debt load and high self-sufficiency of the revenue side of the budget. The rating is supported by high liquidity of the budget and well-balanced debt policy. The rating is under pressure from economic development indicators (on per capita basis), which are significantly below the national average figures.

The Chelyabinsk Region is located in the Ural Federal District. 3.5 mln people live in the Region, of them 1.6 mln live in the Chelyabinsk agglomeration. Since 2011, the Region demonstrates increase in population. The Region ranks third in Russia by number of monotowns: 16 out of 30 towns in the Chelyabinsk Region have that status. In total, around 40.2% of the Region’s urban population live in monotowns.

Key rating assessment factors

An industrial regional economy, with its core represented by metallurgic, food manufacturing, radioactive materials reprocessing, and mechanical engineering enterprises. The share of the manufacturing industry in the GRP averages 35.7%. The share of the metallurgic complex is around 58% of products shipped by the manufacturing industry.

GRP per capita and per capita income equal 73% and 79% of the national average figures, respectively (according to 2014-2015 actual data and 2016-2017 estimates). Per capita income of the Region’s population versus the national averages has declined from 88.8% in 2011 to 76.3% in 2016. At the same time, the observed portion of per capita income in the Region (i.e. excluding “hidden” income) is fairly stable at 85.7% of the observed portion of the national average per capita income in the Russian Federation.

Unemployment figures (according to ILO methodology) exceed the national averages (6.7% vs 5.5% on average in 2014-2017). The unemployment has increased from 6.2% in 2014 to 7%-7.1% in 2015-2016. Nevertheless, the increase in personal income tax revenues in the Region’s consolidated budget in 2015-2016 was equal or exceeded the national average growth rates of personal income tax revenues. According to ACRA estimates, unemployment in 2017-2018 would not exceed 6.5%.

A well-balanced budget policy. The share of tax and non-tax revenues in the total budget revenues is around 85% (excluding subventions; based on 2014-2016 actual data and 2017 estimates), which corresponds to a high self-sufficiency of the budget’s revenue side. In 2014-2016, corporate income tax revenues accounted for 31.2%, and personal income tax revenues for 35.7%, in total tax and non-tax revenues of the regional budget. Mandatory spending share in the total budget equals 73.8% (according to the ACRA methodology), which corresponds to a below average level of control over the expense side of the budget. The operating balance was fairly stable in 2014-2016 (20.4% of regular revenues on average). ACRA expects the operating balance to increase to 23% by year-end 2017. The development budget averages 22.5%, according to ACRA estimates. In 2015-2016, the regional budget had the minimum deficit (below 0.5%). ACRA expects the budget to have a 3.3% surplus in tax and non-tax revenues by year-end 2017.

A well-balanced debt policy. In 2017, the Region fully repaid bank loans: the 2017 planned repayment amounted to RUB 0.827 bln, and RUB 4.05 bln was the amount of early repaid bank loans initially maturing in late November 2019.

As at November 1, 2017, the Region’s government debt comprised fiscal loans and government guarantees (42% and 58% of the debt portfolio, respectively). RUB 8.343 bln out of RUB 10.15 bln of fiscal loans are eligible for 2017 fiscal loans restructuring program, and RUB 1.3 bln were restructured in 2015 with maturity in 2023-2034. Owing to early repayment of the bank debt and restructuring of fiscal loans, the planned debt repayment would not exceed 2% of the operating balance in 2018 and 2019.

Following 2017 results, the amount of issued guarantees would reduce by RUB 8.4 bln and total RUB 5.59 bln. According to ACRA estimates, the probability of payments under government guarantees issued by the regional budget is unlikely.

ACRA estimates that the commercial debt of the Region will equal zero as at January 1, 2018: there is no need in commercial debt owing to a significant surplus of the budget. The current debt load corresponds to minimum risk. According to fiscal loans restructuring rules, the Region may grow its market debt starting in 2018 by no more than 50% of gain in the budget’s tax and non-tax revenues.

High liquidity allows the Region to place temporarily free financial resources in deposits and earn additional income. In 2017, income of the Chelyabinsk Region from placement of temporarily free cash will be 2.25 times as high as its debt servicing expenses. Budget account balances as at month start represented 81% of current month expenses on average for the period from 2014 to October 2017. And in 13 months (of 46) account balances as at month start were in excess of monthly expenses.

Key assumptions

  • Maintaining well-balanced debt and fiscal policies;
  • The 2017 budget has a surplus of over 3% of tax and non-tax revenues;
  • Participation in fiscal loans restructuring program.

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:

  • The Region’s economic indicators (on per capita basis) growing faster than the national averages;
  • A substantial increase of the development budget (capital expenditures) in the budget.

A negative rating action may be prompted by:

  • A substantial decrease of the operating balance;
  • Significantly reduced corporate income tax revenues;
  • A substantial increase debt load and debt servicing costs.

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.

The credit rating has been assigned to the Chelyabinsk Region for the first time. The credit rating and credit rating outlook are expected to be revised within 182 days following the rating action (December 26, 2017).

The credit rating was assigned based on the 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), as well as ACRA’s own databases. The credit rating is solicited, and the Chelyabinsk Region participated in its assignment.

No material discrepancies between the data provided and the data officially disclosed by the Chelyabinsk Region in its financial report have been discovered.

ACRA provided no additional services to the Chelyabinsk Region. No conflicts of interest were discovered in the course of credit rating assignment.

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