The credit rating of the Lipetsk Region (hereinafter, the Region) is based on the Region’s low debt load coupled with a smooth debt repayment schedule, substantial funds held in accounts, and absence of need for debt financing. The rating is constrained by the budget’s dependence on the largest taxpayer and the volatile structure of tax revenues.
The Lipetsk Region is part of the Central Federal District. The Region is home to 1.1 mln people (around 1% of Russia’s population). In 2019, the Region’s GRP amounted to RUB 570 bln (around 0.6% of the total GRP of Russia’s regions). According to the Region’s estimates, its GRP reached RUB 610 bln in 2020.
KEY ASSESSMENT FACTORS
Balanced budget indicators and no need for additional financing. The ratio of the current account balance to current revenues averaged1 for 2018–2022 will be 18%, while the balance of current operations for 2021 remains positive, which indicates that current revenues are sufficient to finance current expenditures.
1 Hereinafter, averages are calculated according to the Methodology for Assigning Credit Ratings to Regions and Municipal Entities of the Russian Federation.
The averaged share of capital expenditures in total expenditures in 2018–2022 will be around 22%, which indicates that as per ACRA’s methodology, the flexibility of budget expenditures is high. The Region independently finances around half of its capital expenditures.
The averaged share of tax and non-tax revenues (TNTR) in the Region’s revenues (excluding subventions) will amount to 79% this year. The averaged ratio of the modified budget deficit to current expenditures is expected to be positive (7%) for 2018–2022, which is largely due to the receipt of surplus profits from the metallurgical industry. The positive value shows that the Region does not need additional borrowed funds to cover its capital expenditures.
Over the first eight months of 2021, the Region’s budget revenues exceeded revenues recorded in the same period in 2020 by more than 1.5x. TNTR in 8M 2021 doubled compared to 8M 2020, with profit tax growing by more than 3.5x, tax on goods and services increasing by 41%, and total income taxes growing by 26%. At the same time, transfers declined by 21% and the volume of dotations fell by more than twofold. Budget expenditures over the first eight months of this year were practically unchanged compared to last year (growth of around 2% was recorded), while the intermediate budget surplus for the aforementioned period amounted to 45% of TNTR (a year earlier there was a deficit of just under 1% of TNTR).
The Region predicts that TNTR may grow by 68% this year amid a simultaneous decline in transfers by 19% compared to the year before. It is assumed that the spending part of the budget will increase by 10%. In that case, the Region’s budget will be executed with a surplus, which will allow account balances to be grow by the end of the year.
Low debt load and a smooth debt repayment schedule. As of October 1, 2021, the Region’s debt had declined by RUB 1.5 bln compared to the start of the year and stood at RUB 12.0 bln. The lower absolute value of debt this year is due to the Region repaying its bank loans and part of its bonds. As of October 1, 2021, the bulk of debt (51%) was made up budget loans, bonds accounted for 48% of the debt portfolio, and the remainder was made up of the Region’s state guarantees. The Region’s debt repayment schedule is balanced, and there are no periods of significant peak payments. The Region must repay or refinance 23% of its debt over the next two years, and repay RUB 1.1 bln (9% of total debt) by the end of 2021.
In 2021, the Region applied to participate in the program for the provision of infrastructure budget loans from the federal budget in accordance with the adjusted limits, and also plans to take part in the infrastructure construction program organized by JSC "DOM.RF" (ACRA rating AAA(RU), outlook Stable).
At the end of 2020, the ratio of debt to current revenues was 21%. ACRA expects this indicator to fall to 11% by the end of 2021, which, according to the Agency’s methodology, indicates low debt load.
Interest expenses are not burdensome for the Region: averaged interest expenses for 2018−2022 will not exceed 1% of total budget expenditures (excluding subventions).
The volume of available liquidity may increase thanks to growth in tax revenues. Since the beginning of 2021, the Region’s account balances have exceeded its monthly expenses by more than twofold. Accumulated funds may be used to finance future budget deficits.
As of September 1, 2021, the Region did not have any overdue accounts payable. The Region deposits accumulated liquidity in a single treasury account, which generates interest income. In addition, the Region has three open credit lines with maturities of more than one year.
Moderately diversified economy strongly concentrated around the metals industry. According to ACRA’s estimates, the averaged share of tax revenues from the metals sector was 36% for 2017–2020. For the first eight months of this year, revenues from metallurgical production sectors formed about 61% of the Region’s tax revenues, which indicates a temporary increase in the dependence of budget revenues on the metallurgical sector in connection with market changes. NLMK is the Region’s largest taxpayer. ACRA notes the potential risks connected with the dependence on a single taxpayer.
The averaged GRP per capita in the Region amounted to 81% of the national average in 2016–2019. The unemployment rate for 2016–2019 did not exceed 4%, but in 2020, it grew to 4.3%. In 2017–2020, the averaged monthly wage was more than three times higher than the averaged regional subsistence minimum.
Execution of the budget in line with the Region’s projected parameters;
Free liquidity accumulating in the Region’s accounts;
Absolute value of debt falling by 19% in 2021 compared to 2020.
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 diversification;
Value of the operating balance exceeding the volume of current income by more than 20%.
A negative rating action may be prompted by:
Ratio of debt to current revenues increasing by more than 30%;
Considerable decline in available liquidity and growth in spending.
Lipetsk Region Government Bond, 35010 (ISIN RU000A0ZZR33), maturity date: October 21, 2025, issue volume: RUB 3 bln — АA(RU).
Lipetsk Region Government Bond, 34011 (ISIN RU000A1013T3), maturity date: November 21, 2024, issue volume: RUB 2.5 bln — АA(RU).
Lipetsk Region Government Bond, 34012 (ISIN RU000A102598), maturity date: September 16, 2025, issue volume: RUB 2.5 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 Lipetsk Region — AA(RU).
The credit ratings have been assigned to the Lipetsk Region and the bonds issued by the Lipetsk Region (ISIN RU000A0ZZR33, RU000A1013T3, RU000A102598) 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 on the National Scale for the Russian Federation was also applied to assign credit ratings to the above issues.
The credit ratings of the Lipetsk Region and the bonds issued by the Lipetsk Region (ISIN RU000A0ZZR33, RU000A1013T3, RU000A102598) were published by ACRA for the first time on July 7, 2017, October 24, 2018, November 21, 2019, and September 15, 2020, respectively. The credit rating of the Lipetsk Region and its outlook and the credit ratings of the bonds issued by the Lipetsk Region are expected to be revised within 182 days following the publication date of this press release as per the Calendar of sovereign credit rating revisions and publications.
The credit ratings were assigned based on data provided by the Lipetsk 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 Administration of the Lipetsk Region participated in their assignment.
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 Administration of the Lipetsk Region. No conflicts of interest were discovered in the course of credit rating assignment.