The credit rating of the Belgorod Region (hereinafter, the Region) is based on its low debt load, insignificant debt refinancing risks, high share of capital expenditures in total budget expenditures, and a positive current account balance. The rating is constrained by the dependence of the budget and the regional economy on the metals industry, the volume of available liquidity, which declined last year, and a growing need for borrowed funds amid an expected budget deficit this year.
The Region is part of the Central Federal District and is home to 1.5 mln people (1% of the population of the Russian Federation). According to the Region’s estimates, its gross regional product (GRP) was RUB 1,275 bln in 2022.
key assessment factors
Available liquidity has declined considerably since the end of 2022. Since the beginning of 2022, funds in the Region’s accounts have exceeded monthly budget expenditures by 2.5 times on average. However, due to the financing of a significant part of the deficit, accumulated funds declined by almost four times. As of the start of 2023, the volume of funds was equivalent to a third of the Region’s total debt. According to the current version of the budget law, it is planned to use almost all accumulated funds to finance this year’s deficit. Consequently, the liquidity ratio of the Region’s budget will be 41% for 2023, according to ACRA’s methodology.
The Region did not have any overdue payables according to data as of October 1, 2022. Although the Region did not need to apply for any short-term budget loans from the Federal Treasury Department in 2022, it may need to do this in 2023.
Moderately high budget profile indicators and a growing need to borrow. The ratio of the current account balance to current revenues averaged1 for 2019–2023 will amount to 13%, and the current account balance for 2023 will continue to be positive according to ACRA.
The averaged share of capital expenditures in total expenditures in 2019–2023 will be around 21%, which, according to ACRA’s methodology, indicates a high level of flexibility of budget expenditures. Capital expenditures are on average more than two-thirds financed by the Region using its own funds. The averaged share of tax and non-tax revenues (TNTR) in the Region’s revenues (excluding subventions) will amount to 79% for the above period.
The ratio of the modified budget deficit to current revenues averaged for 2019–2023 will be -4%, which indicates a growing need to borrow funds to finance capital expenditures amid declining accumulated liquidity.
1 Hereinafter, averages are calculated according to the Methodology for Assigning Credit Ratings to Regions and Municipal Entities of the Russian Federation.
The Region finished 2022 with a significant budget deficit (29% of TNTR), which had to be covered using a large share of previously accumulated liquidity, and this led to growth of debt. The Region’s revenues fell by 13% last year compared to 2021, while TNTR declined by 18%. Internal revenues fell mainly because corporate income tax revenues declined. Just under half of this decline was offset by growth of other tax proceeds (personal income tax proceeds increased by approximately 17%, taxes on goods and services grew by 25%, and there was an almost threefold increase of tax revenues for the use of natural resources) and income from depositing budget funds growing by more than two times. The Region’s budget expenditures increased by just over a third compared to 2021, while capital expenditures increased twofold.
According to the current version of the Region’s budget law, TNTR may continue to fall in 2023 and be around 3% lower than TNTR for 2022. This projected decline will mainly be due to the lack of interest income (which accounted for 4% of TNTR in 2022) in planned revenues. In addition, a possible decline of the volume of transfers by 44% vs. last year is envisaged, which when combined with lower internal revenues, will lead to the budget’s total revenues falling by 13% compared to actual budget execution last year. It is assumed that budget expenditures will decline by 16% compared to 2022, mainly due to capital expenditures falling by a third. Taken together, the above factors may lead to a deficit of 21% of TNTR, which will be approximately half financed by funds in the Region’s accounts, with the remaining part financed by debt.
ACRA proceeds from the assumption that growth of the Region’s budget revenues in 2023 will be close to the rate of expected inflation. At the same time, spending will decline slightly compared to last year. The Agency assumes that the actual budget deficit will be just below the one planned by the Region, and to finance it the Region will have to use all of its accumulated liquidity and resort to borrowing.
Low debt load with insignificant refinancing risks. As of January 1, 2023, the Region’s debt amounted to RUB 31.1 bln, a 22% increase compared to 2021. Debt grew due to the Region taking out budget loans to refinance its commercial debt and the commercial debt of its municipalities, as well as due to the receipt of infrastructure budget loans. As of the start of 2023, the largest portion of debt (56%) was made up of budget loans, 41% was made up of bonds, and the remainder was government guarantees. The debt repayment schedule is balanced, without any peak repayment periods. The Region will have to repay or refinance 38% of its debt over the next two years, and RUB 5.6 bln (18% of the Region’s total debt) is subject to repayment in 2023.
As of the end of 2022, the ratio of the Region’s debt to current revenues stood at 24%. According to ACRA’s estimates, this ratio may grow to 29% by the end of 2023, which still corresponds to a low debt load as per the Agency’s methodology. This growth will be mostly driven by the expected growth of the total size of debt on the back of financing the projected deficit in 2023.
The Region’s interest expenses are not burdensome: interest expenses averaged for 2019–2023 will not exceed 1.0% of total budget expenditures (excluding subventions). The ratio of the Region’s debt to GRP is less than 3%.
Moderately developed economy focused on the metals industry. According to ACRA’s calculations, the averaged share of the Region’s tax revenues from the metal ore mining and metal production industries exceeded 47% in 2018–2021. In 11M 2022, revenues from these two industries formed about 37% of the Region’s tax revenues, which is due to changes in external conditions. The largest company operating in the Region in terms of revenues is Lebedinsky GOK, a company of JSC “HC “METALLOINVEST” (ACRA rating AAA(RU), outlook Stable).
In 2017–2020, the Region’s averaged GRP per capita amounted to 99% of the national average. The ratio of nominal salary to the subsistence minimum averaged for 2018–2021 exceeded 3.5. Unemployment in the Region did not exceed 5% in the period from 2016 to 2021, and in 2021, it equaled 4.2%.
key assumptions
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Gradual decline of tax proceeds from the metals sector of the economy;
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Budget revenues growing in line with expected inflation in 2023;
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Expenditures maintained at the 2022 level;
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Capital expenditures lower than in 2022;
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Covering the projected budget deficit with accumulated liquidity and borrowed funds;
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Maintaining a low debt load in 2023.
potential outlook or rating change factors
The Stable outlook assumes that the rating will highly likely stay unchanged within the next 12–18 months.
A positive rating action may be prompted by:
– Significant increase of current revenues compared to 2022;
– Significant increase of funds in the Region’s accounts.
A negative rating action may be prompted by:
– Lower operational efficiency of the budget caused by insufficient revenues or substantial growth of expenditures;
– Ratio of debt to current revenues exceeding 30%;
– Significant increase of the share of the Region’s short-term debt;
– Significant decline of available budget liquidity.
issue ratings
Belgorod Region, 35011 (ISIN RU000A0JXTW1), maturity date: June 11, 2024, issue volume: RUB 4 bln — AA-(RU).
Belgorod Region, 34012 (ISIN RU000A100PP0), maturity date: August 5, 2024, issue volume: RUB 2 bln — AA-(RU).
Belgorod Region, 34013 (ISIN RU000A100Y84), maturity date: October 15, 2024, issue volume: RUB 2 bln — AA-(RU).
Belgorod Region, 34014 (ISIN RU000A101PA0), maturity date: May 16, 2025, issue volume: RUB 3 bln — AA-(RU).
Belgorod Region, 34015 (ISIN RU000A101RB4), maturity date: May 29, 2025, issue volume: RUB 2.7 bln — АA-(RU).
Belgorod Region, 34016 (ISIN RU000A1025F6), maturity date: September 18, 2025, issue volume: RUB 4.5 bln — АA-(RU).
Rationale. In ACRA’s opinion, the bonds issued by the Belgorod Region listed above are senior unsecured debt instruments, the credit ratings of which correspond to the credit rating of the Belgorod Region.
regulatory disclosure
The credit ratings of the Belgorod Region and the bond issues (ISIN RU000A0JXTW1, RU000A100PP0, RU000A100Y84, RU000A101PA0, RU000A101RB4, RU000A1025F6) of the Belgorod Region were 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 Financial Instruments under the National Scale for the Russian Federation was also applied to assign credit ratings to the above issues.
The credit ratings of the Belgorod Region and the bond issues (ISIN RU000A0JXTW1, RU000A100PP0, RU000A100Y84, RU000A101PA0, RU000A101RB4, RU000A1025F6) of the Belgorod Region were published by ACRA for the first time on June 13, 2017, June 19, 2017, August 5, 2019, October 16, 2019, May 19, 2020, June 1, 2020, and September 18, 2020, respectively. The credit rating of the Belgorod Region and its outlook and the credit ratings of the bond issues of the Belgorod 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 Belgorod 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 Belgorod Region participated in their assignment.
In assigning the credit ratings, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to the Government of the Belgorod