The outlook for the credit rating of the Belgorod Region (hereinafter, the Region) has been changed to Negative due to Agency’s expectations regarding growth in the Region’s debt load coupled with a decline in operational efficiency of the budget caused by financing the projected budget deficit at the end of this year.
The Region’s credit rating 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
The debt load may grow by the end of this year. As of January 1, 2023, the Region’s debt amounted to RUB 31.1 bln; the most significant part of the debt portfolio (56%) was budget loans, 41% was bonds, and the rest of it was government guarantees. The repayment schedule was balanced at the start of the year and there were no peak repayment periods. Over the next two years, 38% of debt needs to be repaid, including 18% (RUB 5.6 bln) in 2023.
As of July 1, 2023, the Region’s debt had increased by 11% compared to the start of the year and amounted to RUB 34.4 bln. Over the past six months, the Region repaid RUB 2.2 bln worth of bonds and RUB 175 mln of its guarantees, however, over the same period it obtained a short-term RUB 4.7 bln loan from the Federal Treasury Department (FTD) and a RUB 1.0 bln budget loan to finance infrastructure projects. Therefore, in view of the current debt structure, the share of budget loans stands at 67%, bonds account for 30%, and guarantees make up less than 3%. According to the current debt repayment schedule, 23% of debt obligations (around RUB 8.0 bln) is to be repaid in 2023, while 18% of debt (RUB 6.2 bln) is to be repaid in 2024. The Agency assumes that short-term budget loans may be refinanced this year using commercial debt.
As of the end of 2022, the Region’s ratio of debt to current revenues was 24% (a low debt load). According to ACRA’s estimates, this ratio may exceed 30% by the end of 2023, which will correspond to a moderate debt load. Growth of the debt load is primarily related to expectations that the absolute value of debt will grow by 42% this year compared to 2022 due to financing the projected budget deficit in 2023.
Interest expenditures are not burdensome for the Region — averaged interest expenditures for 2020–2024 amount to 1% of the budget’s total expenditures (excluding subventions). The ratio of averaged debt to the Region’s GRP is around 3%.
Free liquidity may be used to finance the expected deficit. Since the beginning of 2023, funds in account balances, on average, slightly exceeded monthly budget expenditures. As of January 1, 2023, the volume of funds was equivalent to a third of the Region’s total debt. However, the volume of accumulated funds almost doubled over the past six months. 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 36% for 2023, excluding the funds of autonomous and budgetary institutions.
According to the Region, it did not have any overdue payables as of January 1, 2023. The Region obtained a short-term loan from the FTD in 2023. As of the start of this year, the Region did not have any open credit lines with a drawdown period of more than one year.
Declining operational efficiency of the budget on the back of considerable need to use additional funds. The ratio of the current account balance to current revenues averaged1 for 2020–2024 will amount to around 10%. Despite the fact that the current account balance for 2023 will continue to be positive, the averaged value of the budget’s operational efficiency indicator will decrease. This is due to the volatility of current budget revenues amid stable growth in current expenditures.
The averaged share of capital expenditures in total expenditures in 2020–2024 will remain high and be around 23%. 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 80% for that period.
The ratio of the modified budget deficit to current revenues averaged for 2020–2024 is expected at -11%, which indicates a growing need to borrow funds to finance capital expenditures amid insufficient funds in the Region’s accounts.
The Region finished 2022 with a significant budget deficit (29% of TNTR, taking into account expenditures financed using budget loans to carry out infrastructure projects), which had to be covered using a large share of previously accumulated liquidity, and this led to higher debt.
According to the current version of the Region’s budget law, TNTR in 2023 may be 2% lower than TNTR for 2022. This projected decline will mainly be due to smaller interest income from placing budget funds, which accounted for 4% of TNTR in 2022. At the same time, transfers from the federal budget may increase by almost a third year-on-year, which will lead to the budget’s total revenues growing by 6% vs. 2022. It is assumed that budget expenditures this year will be only slightly higher than they were last year, including current expenditures possibly remaining at a similar level, while capital expenditures will grow by around 6%. The 2023 budget deficit will reach 23% of TNTR. A little less than half of it will be financed using funds in accounts, while the Region plans to cover the rest by borrowing.
As of 6M 2023, budget revenues had increased by more than a quarter compared to the same period in 2022. However, the Region’s TNTR declined by 1%, including corporate income tax proceeds declining by 5%. At the same time, transfers from the federal budget increased by more than 2.5x, largely due to a multiple increase in the size of dotations. Budget expenditures grew by more than 9%, and the interim surplus exceeded RUB 5.6 bln (a year earlier it was RUB 5.4 bln).
ACRA assumes that this year, the Region may use almost all of the funds in its accounts to finance the budget deficit. In addition, a large amount of debt may be raised.
1 Hereinafter, averages are calculated according to the Methodology for Assigning Credit Ratings to Regions and Municipal Entities of the Russian Federation.
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 was around 40% in 2019–2022. At the same time, revenues from these industries formed about 36% of the Region’s tax revenues in 2022, while the maximum (58%) was recorded in 2021. 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 2018–2021, the Region’s averaged GRP per capita amounted to 103% of the national average. The ratio of nominal salary to the subsistence minimum averaged for 2019–2022 remained above 3.5. Unemployment in the Region did not exceed 5% in the period from 2016 to 2022, and in 2022, it equaled 3.7%. The Region’s averaged unemployment for 2019–2022 was 4%.
KEY ASSUMPTIONS
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Decline in tax proceeds from the metals sector of the economy;
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Execution of the revenue and spending parts of the budget as per the current version of the budget law;
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Using all of the funds in the Region’s accounts and borrowing to finance the budget deficit.
POTENTIAL OUTLOOK OR RATING CHANGE FACTORS
The Negative outlook assumes that the rating will highly likely be downgraded within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Growth in operational efficiency of the budget due to higher current revenues;
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Lower need of the budget for borrowed funds;
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Continued low debt load;
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Significant growth in available budget liquidity.
A negative rating action may be prompted by:
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Lower operational efficiency of the budget caused by insufficient revenues or substantial growth in expenditures;
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Ratio of debt to current revenues exceeding 30%;
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Significant increase in the share of the Region’s short-term debt;
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Significant decline in 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 Region. No conflicts of interest were discovered in the course of credit rating assignment.
