ACRA affirms AA-(RU) to the Belgorod Region, outlook Stable, and AA-(RU) to bond issues

The credit rating of the Belgorod Region (hereinafter, the Region) is based on the Region’s low debt load and significant operating balance combined with growth in the internal liquidity of the budget (thanks to a prolonged period of high metal prices). The rating is supported by stable budget discipline indicators, a balanced debt structure, and the Region’s well-developed infrastructure. The rating is limited by regional economic indicators that overall do not exceed the national averages.

About 40% of Russia’s iron ore concentrate is produced in the Region. The local climate is favorable for non-cyclic sectors, including agricultural and food industries. This has a limited positive impact on the diversification of the regional economy, which is dependent on the mining sector.

Key rating assessment factors

Accumulated liquidity and higher budget revenues should allow the Region to finance a potential budget deficit in 2019. Budget revenues amounted to RUB 64 bln as of 8M 2019, a RUB 8 bln increase compared to the same period in 2018. Internal revenues for 8M 2019 grew by 12% (RUB 5.5 bln) year-on-year, while transfers from the federal budget increased by 27% (RUB 2.6 bln). Most of the growth was provided by profit tax (+RUB 2.3 bln due to high prices for raw materials and goods produced by metal companies) and income tax (+RUB 1.9 bln). As of 8M 2019, the intra-annual surplus was 11% of tax and non-tax revenues (RUB 5.8 bln). The regional budget’s target parameters envisage execution of the budget with a RUB 7 bln deficit (9% of TNTR) in 2019. ACRA believes this is unlikely to happen. The budget deficit planned for the current and future periods will be covered mainly by accumulated liquidity.

The draft budget for 2020–2022 allows for a deficit of 8% of TNTR (RUB 6.4 bln) in 2020. Furthermore, the Region plans to boost internal revenues by 7% (RUB 5.6 bln) compared to target parameters for 2019, primarily due to profit tax revenues (+RUB 3.1 bln).

The Region has been financing its budgetary expenditures mostly without resorting to external borrowings: in 2017–2020, the annual average share of internal revenues (excluding subventions) is expected to reach 80%. Capital expenditures of the Region should make up about 18% of expenses and be financed mainly at the expense of the regional budget. At the same time, as per ACRA’s methodology, the share of mandatory expenses continues to be moderate (in the specified period, it is expected to be 62%). According to the Agency’s estimates, this structure of expenses will not change in the medium term.

Low-risk debt load. In 2019, the operating balance after interest charges is expected to exceed the amount of short-term debt by more than five times. Debt servicing expenses should not exceed 7% of the operating balance in 2019–2020. The total amount of debt should not exceed the size of the operating balance by more than 25%. According to ACRA’s methodology, the Region has a low-risk debt load.

As of November 1, 2019, the Region’s debt amounted to RUB 30 bln (including 43% for bonds, 32% for budget loans, 14% for bank loans, and 11% for guarantees). The maximum share of debt refinancing (23%) will fall on 2020. ACRA expects the debt to TNTR ratio of the regional budget to be no higher than 45% at the end of 2019, which is substantially lower than the limits established by the agreement with the Russian Ministry of Finance on restructuring budget loans.

The budget deficit planned for 2019 and 2020 will be covered by account balances, including deposits.

Key assumptions

  • The Region’s economy will continue to depend on the trends in the key local industries;
  • TNTR will decline by not more than 5% annually;
  • Maintaining a well-balanced debt management policy primarily by raising long-term loans with a regular repayment schedule;
  • Gradual reduction in the debt load through sustainable repayments.

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:

  • Further diversification of the regional economy;
  • Growth of economic indicators at faster than average national rates.

A negative rating action may be prompted by:

  • Change in debt policy and time structure of debt;
  • Higher debt servicing costs;
  • Considerable decrease in tax revenues from the metal industry;
  • 2019 budget deficit exceeding 10% of TNTR.

Issue ratings

Belgorod Region Government, 35011 (ISIN RU000A0JXTW1), maturity date: June 11, 2024; issue volume: RUB 4 bln — AA-(RU).

Belgorod Region Government, 34012 (ISIN RU000A100PP0); maturity date: August 5, 2024; issue volume: RUB 2 bln — АA-(RU).

Belgorod Region Government, 34013 (ISIN RU000A100Y84); maturity date: October 15, 2024; issue volume: RUB 2 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 Belgorod Region.

Regulatory disclosure

The credit ratings of the Belgorod Region and the bonds (RU000A0JXTW1, RU000A100PP0, RU000A100Y84) issued by the Belgorod Region have 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. In the course of assigning a credit rating to the bond issues above, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation has also been used.

The credit ratings assigned to the Belgorod Region and the bonds (RU000A0JXTW1, RU000A100PP0, RU000A100Y84) issued by the Belgorod Region were published by ACRA for the first time on June 13, 2017, June 19, 2017, August 5, 2019, and October 16, 2019, respectively. The credit rating of the Belgorod Region and its outlook and the credit ratings of the bonds issued by the Belgorod Region are expected to be revised within 182 days following the publication date of this press release as per the Calendar of planned sovereign credit rating revisions and publications.

The credit ratings are based on data provided by the Belgorod 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 ratings are solicited, and the Government of the Belgorod Region participated in their assignment.

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

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

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