The credit rating of the Sverdlovsk Region (hereinafter, the Region) is based on the Region’s strong economic profile, as well as a stable budget profile with a high share of internal revenues and a growing share of capital expenses in the budget.
The Region’s growing debt load limits the rating. However, the Region’s debt repayment schedule does not create refinancing risks.
The Sverdlovsk Region is part of the Ural Federal District, bordering seven other regions of the Russian Federation. The Region’s population is about 4.3 million (3% of Russia’s total population). According to the Region’s government, its GRP amounted to RUB 2.5 tln in 2020 (the Region’s GRP has been consistently around 3% of the total GRP generated by Russia’s regions).
Key rating assessment factors
The Region’s economic profile features moderate concentration on the metals sector. The Region’s averaged1 GRP per capita consistently exceeds 90% in comparison to the national average. The ratio of averaged wages to the minimum subsistence level was 3.6 in 2017–2020.
In 2020, unemployment in the Region averaged for the last four years and calculated according to the ILO’s methodology equaled 5.2%.
The processing industry, with moderate concentration on the metals sector, forms the core of the Region’s economy. Nine of the Region’s 20 largest companies in terms of revenue in 2020 were involved in metalworking. However, ACRA assesses the direct contribution of the metals industry in the Region’s total tax revenues at 18.5% for 2020.
1 Hereinafter, averages are calculated according to the Methodology for Assigning Credit Ratings to Regions and Municipal Entities of the Russian Federation.
The Region’s debt load is growing, but the Russian Government’s measures to restructure part of regions’ debts will allow the Region to maintain its smooth repayment schedule. According to ACRA, the debt to current revenue ratio will exceed 0.5 at the end of 2021. According to the law on the Region’s budget for the current year2, the Region plans to increase the share of bank loans to 29% (a threefold increase) and reduce its share of budget loans to 13%. The share of bonds, however, will remain unchanged at 58%. In 2021, the Region’s public debt will increase by 23% and total RUB 140.2 bln. However, in 2021 ACRA expects a number of government measures to be implemented: part of the commercial debt will be refinanced and a budget loan provided at the end of 2020 will be restructured. These measures will have a positive impact on the public debt repayment schedule, despite the increasing debt load.
Currently (prior to the implementation of government measures) the debt repayment schedule assumes that the Region will repay or refinance around 16% of its debt on average each year from 2021 to 2024 (peaking at 21% of total debt in 2021), which does not indicate any refinancing risks.
The ratio of averaged interest expenses to averaged total budget expenses (excluding subventions) for the period from 2017 to 2021 is low and stands at around 2.2%.
The low debt load of municipalities in the Region continues to decrease. The ratio of total debt to total tax and non-tax revenues (TNTR) of the municipalities dropped from 13% in 2016 to 5% in 2020. In absolute numbers, municipal debt declined by RUB 3 bln in the abovementioned period to RUB 3.5 bln.
2 Law of the Sverdlovsk Region No. 144-OZ dated December 10, 2020 (amended on June 17, 2021) “On the Regional Budget for 2021 and the Planned Period of 2022 and 2023” (passed by the Legislative Assembly of the Sverdlovsk Region on December 8, 2020).
Self-sufficient budget with a high share of capital expenses. The Region’s law on its budget for the current year provides for the execution of the budget in 2021 with a deficit of RUB 40.6 bln (17% of TNTR). Transfers will decrease by 21%, which, along with a 10% increase in TNTR, will lead to an increase in total revenues by 3%, to RUB 294.5 bln. Total expenses will increase by 6% (to RUB 335.1 bln).
The Region’s budget is characterized by a moderately high share of internal revenues — in 2017–2021 the averaged ratio of TNTR to revenues (excluding subventions) should equal 86.4%. The averaged share of capital expenses in budget expenses, excluding subventions, is stably increasing and will amount to 19.5% in 2017–2021.
The operating efficiency indicator of the Region’s budget averaged for 2017–2021 will amount to 9.7%. The modified budget deficit to current income ratio of the Region averaged for this period should be negative (-8%), which points to the Region’s need for additional financing of capital expenses by either borrowing and/or using account balances.
Growth of intermediate liquidity. As of June 1, 2021, the balances of the Region’s budget covered 90.6% of its average monthly expenses for the last 12 months, or 22.1% of its total debt as of June 1, 2021. This volume is 1.1 times higher than the Region’s public debt that must be repaid in 2021 (as of June 1, 2021). Throughout the period from 2017 to 2021, the modified free cash flow is negative, except for 2018. Due to this, the Region regularly needs to attract liquidity, and therefore the Region increases its debt every year.
- TNTR growing by 10% in 2021 compared to 2020;
- Total expenses growing by 6% in 2021 compared to 2020 and then declining in 2022;
- Capital expenses falling in the event of a shortfall of revenues compared to the target;
- Debt growing by no more than 23% in 2021;
- Maintaining socio-economic indicators at their current levels.
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:
- Improved economic profile;
- Higher available liquidity;
- Execution of a balanced budget;
- Reduced debt load.
A negative rating action may be prompted by:
- Decrease in the share of TNTR in total revenues (excluding subventions);
- Growth of current expenses that is not accompanied by growth in current revenues.
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).
Sverdlovsk Region, 35005 (ISIN RU000A0ZZQH9), maturity date: October 23, 2026, issue volume: RUB 5 bln — А+(RU).
Sverdlovsk Region, 35006 (ISIN RU000A1016N9), maturity date: December 15, 2026, volume: RUB 5 bln — А+(RU).
Sverdlovsk Region, 34007 (ISIN RU000A101UG7), maturity date: June 28, 2025, volume: RUB 10 bln — А+(RU).
Sverdlovsk Region, 35008 (ISIN RU000A101Z17), maturity date: July 29, 2027, volume: RUB 12 bln — А+(RU).
Sverdlovsk Region, 35009 (ISIN RU000A102CT6), maturity date: November 17, 2027, volume: RUB 8 bln — А+(RU).
Sverdlovsk Region, 34010 (ISIN RU000A102DQ0), maturity date: November 23, 2024, volume: RUB 10 bln — А+(RU).
Sverdlovsk Region, 35011 (ISIN RU000A102HF4), maturity date: December 16, 2023, volume: RUB 10 bln — А+(RU).
Rationale. In ACRA’s opinion, the bonds of the Sverdlovsk Region are senior unsecured debt instruments, the credit ratings of which correspond to the credit rating of the Sverdlovsk Region.
The credit ratings of the Sverdlovsk Region and the bonds issued by the Sverdlovsk Region (ISIN RU000A0JWZ77, RU000A0ZYDU3, RU000A0ZZQH9, RU000A1016N9, RU000A101UG7, RU000A101Z17, RU000A102CT6, RU000A102DQ0, RU000A102HF4) have been assigned under the national scale for the Russian Federation based on the Methodology for Assigning Credit Ratings to Regions and Municipal Entities of the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments Under the National Scale for the Russian Federation was also applied to assign credit ratings to the above issues.
The credit rating of the Sverdlovsk Region and the credit ratings of the government bonds (ISIN RU000A0JWZ77, RU000A0ZYDU3, RU000A0ZZQH9, RU000A1016N9, RU000A101UG7, RU000A101Z17, RU000A102CT6, RU000A102DQ0, RU000A102HF4) issued by the Sverdlovsk Region were published by ACRA for the first time on September 8, 2017, October 24, 2017, October 24, 2017, October 18, 2018, December 11, 2019, June 29, 2020, July 24, 2020, November 18, 2020, November 20, 2020, and December 11, 2020, respectively.
The credit rating of the Sverdlovsk Region and its outlook, as well as the credit ratings of the government bonds (ISIN RU000A0JWZ77, RU000A0ZYDU3, RU000A0ZZQH9, RU000A1016N9, RU000A101UG7, RU000A101Z17, RU000A102CT6, RU000A102DQ0, RU000A102HF4) issued by the Sverdlovsk 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 were assigned based on 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), and ACRA’s own databases. The credit ratings are solicited, and the Government of the Sverdlovsk Region participated in the rating process.
In assigning the credit ratings, ACRA used only information, the quality and reliability of which was, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to the Government of the Sverdlovsk Region. No conflicts of interest were discovered in the course of credit rating assignment.