The credit rating of the Belgorod Region (hereinafter, the Region) is based on its low debt load, moderate 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 volatile revenues of the metals industry, the moderately low volume of liquidity, and a growing need for borrowed funds amid an expected budget deficit this year.
The Negative credit rating outlook has been maintained due to a likely increase in the Region’s debt load in the forecast period amid obtaining a significant amount of commercial loans to cover the deficit projected by the end of this year, as well as a possible decline in the volume of transfers from the higher budget compared to 2023, which has a negative impact on the operational efficiency indicator of the Region’s budget.
The Region is part of the Central Federal District and is home to 1.5 mln people (1% of the country’s population in 2023). According to the Region’s estimates, its gross regional product (GRP) was RUB 1,359 bln in 2023.
KEY ASSESSMENT FACTORS
The debt load may grow significantly by the end of this year. As of January 1, 2024, the Region’s debt amounted to RUB 31.6 bln. Budget loans and the Region’s bonds accounted for 73% and 24% of the debt portfolio, respectively, while the remainder was government guarantees. As per its schedule, in 2024–2025, the Region had to repay or refinance 47% of its debt, with 28% due in 2024 and bonds accounting for most of the repayments.
By December 1, 2024, the Region’s debt declined by 13% since the beginning of the year and amounted to RUB 27.5 bln. In this period, the Region has repaid a planned total of RUB 5.4 bln of bonds, as well as RUB 3.2 bln of budget loans. At the same time, in Q2 of this year a short-term loan was obtained from the Federal Treasury Department (FTD) worth RUB 4.0 bln and is due in Q4 2024. The Region also borrowed budget loans to finance infrastructure projects for the total of RUB 0.5 bln due until 2039. In accordance with the debt repayment schedule as of December 1, 2024, 15% of debt obligations, almost completely consisting of a loan from the FTD, were due to be repaid this year, and 23% of the debt fell on 2025.
At the end of 2023, the Region’s ratio of debt to current revenues was 20%. According to ACRA’s estimates, this ratio may grow to 23% by the end of 2024, mostly due to the expected increase in absolute debt. According to the Agency’s projections, the Region’s debt load may exceed 30% in 2025.
Interest expenditures are not burdensome for the Region: averaged1 interest expenditures for 2021–2025 will amount to less than 1% of total expenditures (excluding subventions), while this year’s ratio of debt to GRP is expected to be around 3%.
The Region’s debt portfolio is determined as strong. The bulk of debt is currently long-term non-commercial borrowings, however, by the end of this year a substantial amount of commercial debt may be borrowed to finance the expected budget deficit. The weighted average debt repayment period slightly exceeded 3.5 years at the beginning of the year. There are no cases of overdue debt liabilities or forced restructuring of debt. The operational efficiency of the Region’s budget is consistently positive, which indicates that it is not necessary to finance current expenditures using additional funds. The debt load of the Region’s municipalities is very low: the ratio of their debt to tax and non-tax revenues (TNTR) was 17% in 2023. The financial debt of state-owned unitary enterprises was RUB 1.6 bln as of October 1, 2024, and they did not have any overdue payables. Currently the Region has seven concession agreements, and the volume of payments under them for the Region’s budget will exceed RUB 2.0 bln in 2024–2026. In addition, the Region has concluded a number of leasing contracts with an annual volume of payments at about RUB 0.7 bln in 2024–2026.
1 Hereinafter, averages are calculated according to the Methodology for Assigning Credit Ratings to Regions and Municipal Entities of the Russian Federation.
Liquidity may be used to cover the expected budget deficit. Last year, the volume of the Region’s account balances shrank by 10% compared to 2022. In the past period of this year, the volume of temporarily free funds averaged 70% of monthly expenditures. In accordance with the Region’s plans to cover the budget deficit expected this year, accumulated account balances can be used entirely, which would help minimize the increase in the Region’s debt. The Agency notes that the Region attracts funds from autonomous and budgetary institutions to replenish its own balances. As of December 1, 2024, about a third of the Region’s liquidity was generated from these funds.
The Region’s budget liquidity ratio will amount to 65% in 2024. ACRA applies a negative border value adjustment to this indicator since it is expected to significantly decrease in 2025.
The qualitative assessment of budget liquidity is moderately strong. As evidenced by the debt repayment schedule as of December 1, 2024, the refinancing risks of the Region’s debt liabilities are assessed as moderately low because most of the debt is scheduled to be repaid in the next two years. The Region actively uses short-term FTD loans. As of the start of December this year, the Region had three revolving credit lines worth a total of RUB 9.0 bln and a maturity in 2026. According to the Region, no payables were overdue as of October 1, 2024.
Positive operational efficiency and the budget’s considerable need to use additional funds. The ratio of current account balance to current revenues averaged for 2021–2025 will amount to 10% according to the Agency’s projections. The current account balance is also expected to be positive by the end of 2024, which indicates the sufficiency of current revenues to finance current expenditures in full. The Agency notes that the current account balance has been positive each year but it varies significantly due to the volatility of current budget revenues amid stable growth of current expenditures. According the draft law on the Region’s budget for 2025–2027, the averaged value of the current account balance may fall below 10% in 2025, which would negatively affect the assessment of the Region’s financial profile.
The averaged share of capital expenditures in total expenditures for 2021–2025 will remain high (about 20%). The Region independently finances, on average, around three quarters of capital expenditures. The averaged share of TNTR in the Region’s revenues (excluding subventions) will amount to 82% for the above period.
The ratio of modified budget deficit (MBD) to current revenues averaged for 2021–2025 is projected at -7%, moreover, this year the size of the MBD may exceed the current account balance, which indicates a significant need to borrow funds to finance capital expenditures amid insufficiency of the Region’s internal funds. However, taking into account the low value of the Region’s debt load, ACRA has adjusted its assessment of the MBD to a higher category.
The Region’s budget profile is assessed as moderately strong. ACRA takes into account the periodic substantial deviations of actual budget revenues from the targets due to the strong dependence of tax proceeds on sectors of the economy characterized by high volatility. The Region has not violated budget law. The amount of lost funds in connection with the provision of benefits, in the Agency’s opinion, is not significant for the Region’s budget. According to the Region, tax expenditures amounted to less than 1% of TNTR in 2023 and they may remain unchanged in 2024.
The Region finished 2023 with a budget deficit of 2% of TNTR, approximately half of which was covered by accumulated liquidity, while the remaining part was covered using budget loans.
As per the parameters of the current version of the Region’s budget law, the revenue side at the end of the current year may decrease by 2% compared to 2023. At the same time, TNTR is expected to increase by 5%, which will be largely due to corporate income tax revenues increasing by 5% and personal income tax increasing by 11% compared to last year. Aggregate income tax revenues are planned to grow by a significant 27% in 2024. At the same time, the volume of transfers may decrease by 19% year-on-year, mainly against the backdrop of a decrease in the volume of current transfers by about one-third. Budget expenditures are expected to increase by 10% this year, which will lead to the formation of a budget deficit at 18% of TNTR (taking into account the use of account balances). The projected deficit will be largely covered by commercial borrowings, and the remainder will be covered by balances in the Region’s accounts, which are planned to be used in full.
In 10M 2024, budget revenues decreased by 6% y-o-y. TNTR increased by 7%, mainly due to higher personal income tax revenues (+20%) and aggregate income tax revenues (+33%). Corporate income tax revenues remained virtually unchanged year-on-year. The volume of transfers decreased by a little more than a third compared to the indicator as of November 1, 2023, including subsidies from the higher budget decreased by 60%. Regional budget expenditures increased by 2%, which led to a slight interim budget deficit.
According to the draft law on the regional budget for 2025–2027, budget revenues will decrease by 6% compared to the figure expected by the end of this year, due to a potential reduction in transfers by about a third. At the same time, the Region’s TNTR will grow by 3%. The Region expects further growth in personal income tax revenues and aggregate income tax revenues (+6% and +14%, respectively), while corporate income tax revenues may decrease slightly. The expenditure side of the budget is planned to decrease by 21% to the level at the end of 2024. The budget deficit by the end of 2025 will be about 11% of the expected TNTR.
ACRA assumes that this year, growth of personal income tax revenues and aggregate income tax revenues may be a lot higher than the Region’s projections. In addition to this, the Agency expects that the Region may opt not to spend the entire planned amount of capital expenditures in order to reduce the budget deficit by the end of this year. In this case, the Region would need to borrow less commercial loans to finance the deficit, but the account balances will be used in full.
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 just under 40% in 2020–2023. At the same time, revenues from these industries formed about 36% of the Region’s tax revenues in 2022–2023, while the maximum (58%) was recorded in 2021. A significant share of tax revenues in 2023 was also formed by such sectors as retail and wholesale trade (10%), agriculture (7%), and food production (7%). The largest companies operating in the Region in terms of revenues are Coordinating Distribution Center “EFKO – Kaskad”, engaged in the trade of edible oil and Lebedinsky GOK, a company of JSC “HC “METALLOINVEST” (ACRA rating AAA(RU), outlook Stable).
In 2019–2022, the Region’s averaged GRP per capita amounted to 95% of the national average. According to the Region’s expectations for 2023 GRP, averaged per capita GRP remained within the range for the current category in 2020–2023. The ratio of the nominal salary to the subsistence minimum averaged for 2020–2023 remained above 3.5. Unemployment in the Region did not exceed 5% in the period from 2016 to 2023, and in 2023, it was below 4%. The unemployment rate averaged for 2020–2023 was also around 4%.
KEY ASSUMPTIONS
-
Stronger growth of personal income tax and aggregate income tax revenues in 2024 compared to the parameters approved in the current version of the Region’s budget law;
-
Lower-than-planned volume of capital expenditures to reduce this year’s budget deficit;
-
Using the Region’s own funds, along with borrowings, 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:
-
Lower need of the budget to attract additional funds;
-
Significant growth in available budget liquidity.
A negative rating action may be prompted by:
-
Decrease in the operational efficiency of the budget by the end of the year;
-
Ratio of debt to current revenues exceeding 30%;
-
Significant increase in the share of the Region’s short-term debt.
ISSUE RATINGS
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 RU000A101PA0, RU000A101RB4, RU000A1025F6) of the Belgorod Region 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 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 RU000A101PA0, RU000A101RB4, RU000A1025F6) of the Belgorod Region were published by ACRA for the first time on June 13, 2017, 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.
