Training on Forecasting September 17–18

ACRA affirms AA-(RU) to the Chelyabinsk Region, outlook Positive

The credit rating of the Chelyabinsk Region (hereinafter, the Region) is based on the Region's minimal debt load and very high budget liquidity. The rating is limited by per capita indicators of the regional economy that are much lower than the national averages, as well as by a high share of mandatory budget expenses. The credit rating outlook is based on the gradual growth of budget discipline indicators.

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

Key rating assessment factors

Minimal credit risk. The Region’s debt load is minimal; the debt to operating balance ratio did not exceed 0.5 in 2017-2018. If the Region provides full guarantees by the end of 2019 as stipulated by the budget law, this ratio will increase to 0.8. According to ACRA, this corresponds to a low level of credit risk. As of June 6, 2019, the Region’s debt is made up of budget loans and guarantees. Therefore, there are practically no servicing expenses or refinancing risks in the medium-term. The surplus planned for the end of this year could be fully financed by account balances.

Tax revenues depend on the metals sector; budget policy is well-balanced. The Region’s surplus in 2018 amounted to 8.5% of tax and non-tax revenues (TNTR); TNTR grew 19%. Almost half of this growth was provided by income tax (+RUB 9.8 bln) from the metals sector, where income tax increased by 57% (RUB 9.4 bln). The contribution of the metals sector to the growth of overall tax revenues amounted to more than RUB 11 bln (the largest enterprises in the sector are PJSC “MMK” and PJSC “ChMK,” owned by PJSC “Mechel”). The increase in tax revenues from this sector is due to the continued growth in ruble prices for metals. ACRA expects the growth rates of the Region’s revenues to drop compared to 2018 due to deterioration in commodity prices. Nevertheless, the dynamics of the Region's revenue performance for the four months of 2019 remains positive due to high ruble prices for metals (execution of budget revenue items is 17% ahead compared to 2018, while expenses are growing at the same pace). The Region’s budget is highly self-sufficient; proprietary revenues (excluding subventions) average 86% for 2016-2019. The operating balance for this period increased from 21% to 28% of regular revenues. Budget discipline in 2019 will be determined by conditions in the metals market and the Region’s ability to manage mandatory expenses, the share of which is substantial in the budget structure.

A high level of liquidity allows the Region to place temporarily free financial resources in deposits and increase the budget’s non-tax revenues. The average monthly volume of deposits for the five months of 2019 exceeds monthly budget expenses by more than 1.5x. As of May 1, 2019, account balances surpass the Region’s debt by 2x (including issued state guarantees).

Key assumptions

  • Maintaining balanced budget policy in which the growth rates of expenses (including current expenses) do not exceed the growth rates of proprietary revenues;
  • Executing the 2019 budget with a surplus lower than 11% TNTR. 

Potential outlook or rating change factors

The Positive outlook assumes that the rating will most likely change 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;
  • Long period of 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 assigned to the Chelyabinsk Region was first published by ACRA on December 26, 2017. The credit rating and credit rating outlook are expected to be revised within 182 days following the publication date of this press release in accordance with 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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