Training on Forecasting September 17–18

ACRA upgrades the Sverdlovsk Region to A(RU), outlook Stable, and bond issues to A(RU)

ACRA has upgraded the credit rating of the Sverdlovsk Region (hereinafter, the Region) on positive trends in the regional budget and economy and high-efficient budget liquidity management strategy.

The Sverdlovsk Region is a part of the Urals Federal District, bordering seven other regions of the Russian Federation. The Region’s population is about 4.3 million people (2.95% of the total population of the Russian Federation, the 5th place in the Russian Federation). In 2016, the regional GRP amounted to RUB 1.98 trillion (2.9% of the total GRP of Russian regions, the 6th place in the Russian Federation).

Key rating assessment factors

Growing industry production drives budget tax revenues up. In January–July 2018, the industrial production index increased by 8.2% y-o-y, while the national average growth was only 3.1%. Since early 2016, the Region's industrial production volume has grown by 14.6% as compared to Russia average of 7.8%. The unemployment rate under ILO methodology has fallen below the average rate for the Russian Federation.

In 1H2018, the budget revenues from profit tax and personal income tax grew by 10.1% and 11.7% y-o-y, respectively. The most significant contributors to profit tax revenues were steelmakers and IT and financial services companies. The increase in personal income tax in the manufacturing and trade segments provided about 41% of the total increase in the personal income tax collectibles. Growing salaries in the budget financed sectors, including education, health care, etc., contributed only 18% to the increase in personal income tax in 1H2018.

In general, in 1H2018, regional budget revenues increased by 10.39% and expenses by 8.1%; budget surplus was 9.4% of tax and non-tax revenues (TNTR) against 7.3% in 1H2017.

Passive and active intra-year liquidity management allows the Region to cut budget debt servicing expenditures and earn additional income from short-term deposits. As of August 01, 2018, the volume of regional debt amounted to RUB 48.5 billion, RUB 27 billion less than at the beginning of the year. Within a year, the Region reduces the debt under bank loans at the expense of both intra-year budget surplus and temporarily free account balances of subordinated institutions. This strategy allows the Region to reduce the budget debt servicing expenditures (RUB 1.87 billion in 1H2018 against RUB 2.52 billion in 1H2017). The Region places, from time to time, temporarily free cash in deposits, which allows it to receive additional income (RUB 83.7 million in 1H2018).

As of August 01, 2018, the debt profile was dominated by budget loans (42.5%) that mature in 2018–2034, bonds (30.9%) that mature in 2020–2025) and bank loans (24.3%) that mature in 2019–2022.

Key assumptions

  • The 2018 budget will be executed with a deficit of not more than 2% of TNTR or a surplus;
  • By late 2018, the market debt will grow up to the level comparable with that in early 2018;
  • The market debt will be raised under such interest rates that will not drive the budget debt service costs up significantly and will not result in a breach of 2017 budget loans restructuring conditions.

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:

  • A steadily decreasing share of market debt in the Region's debt portfolio;
  • The share of capital expenditures growing above 15% of TNTR.

A negative rating action may be prompted by:

  • Budget deficit over 5% of TNTR in 2018;
  • A breach of budget loans restructuring conditions, which may trigger a partial prepayment of budget loans.

Issue ratings

Sverdlovsk Region, 35003 (ISIN RU000A0JWZ77), maturity date: November 15, 2024, issue volume: RUB 5 bln — А(RU).

Sverdlovsk Region, 35004 (ISIN RU000A0ZYDU3), maturity date: October 22, 2025, issue volume: RUB 10 bln — А(RU).

Rationale. ACRA is of the opinion that the above bonds issued by the Sverdlovsk Region are senior unsecured debt instruments, which credit ratings are equal to that of the Sverdlovsk Region.

Regulatory disclosure

The credit ratings of the Sverdlovsk Region and bonds (ISIN RU000A0JWZ77, ISIN RU000A0ZYDU3) issued by the Sverdlovsk Region under the national scale for the Russian Federation were assigned and upgraded based on the Methodology for Credit Ratings Assignment to Regional and Municipal Authorities of the Russian Federation, and the Key Concepts Used by 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 was also used.

The credit rating of the Sverdlovsk Region and the credit ratings of the government bonds (ISIN RU000A0JWZ77, ISIN RU000A0ZYDU3) issued by the Sverdlovsk Region were first published by ACRA on September 08, 2017 and October 24, 2017, respectively.

The credit rating of the Sverdlovsk Region and its outlook, as well as the credit ratings of the government bonds (ISIN RU000A0JWZ77, ISIN RU000A0ZYDU3) issued by the Sverdlovsk Region are expected to be revised within 182 days following the rating action date (September 03, 2018) as per the Calendar of planned sovereign credit rating revisions and publications.

The credit ratings were assigned and upgraded based on the 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), as well as ACRA’s own databases. The credit ratings are solicited, and the Sverdlovsk Region Government participated in the rating process.

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

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

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