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ACRA upgrades the Chelyabinsk Region to AA(RU), changes outlook to Stable

ACRA has upgraded the credit rating of the Chelyabinsk Region (hereinafter, the Region) based on the Region’s steadily growing budget liquidity, minimum debt load and conservative debt policy, steady economic growth rates, and positive tendencies in social and economic development. The rating is limited by per capita economic development that is significantly behind national averages, as well as high mandatory budget expenses.

The Chelyabinsk Region is located in the Ural Federal District and is home to 3.5 mln people, just over 2% of the Russian population. In 2018, the Region's GRP amounted to RUB 1.514 tln.

Key rating assessment factors

A high level of liquidity and steadily growing account balance allow the Region to place temporarily free funds in deposits and increase the budget’s non-tax revenues. The average volume of deposits at the beginning of each month from January 1, 2019, to November 1, 2019, was almost 1.5x higher than for the same period in 2018. As of November 1, 2019, deposits exceeded debt by 80% (including issued state guarantees) and the total account balance by more than 2x. In addition, the balance has more than doubled the average monthly expenses of the regional budget in 2019.

Minimal credit risk. The Region’s debt load is minimal. The current version of the budget law assumes the issuance of a significant amount of guarantees (as of November 1, 2019, no new guarantees were provided), which will increase the Region’s debt to operating balance ratio to 0.9 compared to 0.36 at the end of 2018. However, this does not affect the overall debt load assessment, as the remaining debt parameters should remain unchanged. As of November 1, 2019, the Region’s debt consisted of budget loans (56%) and guarantees (44%), and therefore there are practically no servicing costs. There are no refinancing risks in the medium term. According to the current version of the budget law, the Region can execute its budget with a tax and non-tax revenues (TNTR) deficit of 8.5% at the end of 2019. Nevertheless, ACRA expects a smaller TNTR deficit of 3.7% that will be covered by account balances. Account balances also fully cover the deficit planned in the 2020 budget law draft. ACRA does not expect the Region to increase its debt to finance the deficit over the next 13 months.

Tax revenues depend on the metals sector; budget policy is conservative. Regional budget revenues depend on the condition of the metals market. In 2018, the regional budget was executed with an 8.5% TNTR surplus. However, ACRA expects a TNTR deficit of within 3.7% for 2019 amid falling prices for metals and the resulting slowdown in revenues. In 2020, the budget deficit could be up to 15.8% of TNTR. The largest enterprises in the sector are PJSC “MMK” (RUB 458 bln in revenues for 2018), PJSC “Chelpipe” (RUB 127 bln), and PJSC “ChMK” (RUB 124 bln, owned by PJSC “Mechel”). ACRA estimates that tax revenues from the metals sector account for about a quarter of total tax revenues. Given the dependence of TNTR on the conditions of the metals market, the Region adheres to conservative debt and budgetary policies (almost a third of expenses are reduced). The regional budget is highly self-sufficiency; internal revenues (excluding subventions) should average 85% for 2017-2020 and the operating balance should average 20% of regular revenues for the same period. If the Region is able to control spending beyond capital expenses, this indicator could be volatile depending on the ability and willingness of the Region to use account balances. The Region’s GRP is growing steadily, which is reflected in the dynamics of the per capita value of the indicator. The unemployment rate is declining rapidly.

Key assumptions

  • Maintaining a conservative budget policy, in which the growth rate of expenses (including current ones) does not exceed the growth rate of internal revenues;
  • Maintaining a conservative debt policy;
  • Executing the 2019 budget with a TNTR deficit below 5%.

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:

  • Increased budget discipline;
  • Growth rates of household income and real GRP that are ahead of national figures.

A negative rating action may be prompted by:

  • Significant decrease in operating balance with an increase in mandatory expenses;
  • Prolonged growth in the relative debt load.

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 of the Chelyabinsk Region was first published by ACRA on December 26, 2017. The credit rating and its outlook 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 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 Government of the Chelyabinsk Region participated in its assignment.

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

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

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