(The following statement was released by the rating agency)
Dec 12 -
Summary analysis -- Chelyabinsk Oblast ---------------------------- 12-Dec-2012
CREDIT RATING: BB+/Stable/-- Country: Russia
Primary SIC: Legislative
Credit Rating History:
Local currency Foreign currency
13-Dec-2010 BB+/-- BB+/--
The ratings on Chelyabinsk Oblast reflect Standard & Poor's Ratings Services'
view of its low budgetary flexibility and predictability under Russia's
developing and unbalanced system of interbudgetary relations. Economic
concentration on metallurgy and exposure to a single taxpayer, which leads to
revenue volatility, and a lack of reliable medium-term financial and capital
planning, which is common for most Russian peers, also constrain the ratings.
The oblast's sound budgetary performance, low debt burden, and a positive
liquidity position support the ratings.
Chelyabinsk Oblast's economy is concentrated on the cyclical metallurgy
industry. We estimate that ferrous metallurgy, including the oblast's largest
taxpayer, OAO Magnitogorsk Metallurgical Kombinat (MMK; not rated), accounts
for about 17% of the oblast's gross regional product (GRP) and will provide
about 10% of tax revenues over the next three years. This share has been
gradually decreasing in recent years, but in our view it will likely continue
to expose the oblast's budget revenues to volatility and constrain its
financial predictability over the medium term. In 2012, tax revenues will
likely be weaker than we expected in our previous forecast, due to a more
pronounced deterioration in the performance of steel and pipe producers and
the consequent tax paybacks claimed by the oblast's largest taxpayers.
The oblast's budgetary flexibility and predictability is also constrained by
dependence on federal decisions regarding intergovernmental relations, tax
regimes, and spending responsibilities. The oblast has very little control
over its budget revenues, about 95% of which will likely come from
state-regulated taxes and transfers from the federal government in 2013-2015.
Chelyabinsk Oblast has little leeway in terms of managing its operating
spending, and the federally driven increases in public sector salaries will
likely further limit the oblast's flexibility and pressure its budgetary
performance in the next three years. Nevertheless, we believe the oblast has
some flexibility to curtail its budgeted expenditures, especially in its
sizable capital program that will likely make up about 18% of total
expenditures in 2013-2015 and could be at least partly cut if the oblast faced
We expect that over the next three years the oblast's management will revert
to tight control over spending growth in order to maintain sound budgetary
performance. We expect that an average 3.5% annual gross regional product
(GRP) growth and sluggish performance of the metals industry will lead to an
only modest rebound in tax revenues over the medium term. At the same time, we
estimate that the federal initiatives to increase public sector salaries,
which only modestly affected the oblast's finances in 2012, might cost the
oblast about 8% of additional operating spending in 2013. We expect that, in
line with its conservative policies, the oblast's management will limit the
growth of non-personnel-related spending in order to keep deficits and
borrowing needs low. Our base-case scenario therefore assumes relatively high
operating margins of about 9% of operating revenues in 2013-2015 and modest
deficits after capital accounts below 5% of total revenues.
Chelyabinsk Oblast's total tax-supported debt will likely increase only
gradually and will stay at an average of 27% of consolidated operating
revenues in 2013-2015. We expect that the oblast will continue modest
accumulation of direct debt, and the amount of new guarantees provided to
support regional investment projects and agricultural producers will decrease
in the next three years compared with 2011-2012.
We view Chelyabinsk Oblast's liquidity position as "positive", because we
expect it to maintain average cash exceeding its very low debt service falling
due in 2013-2015. At the same time, we view the oblast's access to external
liquidity as limited, as it is for most Russian local and regional governments
(LRGs), given the weaknesses of the domestic capital market, to which we
assign a Banking Industry Country Risk Assessment score of '7', with '1' being
the lowest risk and '10' being the highest. (For more details see "Banking
Industry Country Risk Assessment: Russia," published March 19, 2012, on
RatingsDirect on the Global Credit Portal).
We expect the oblast to maintain low debt service of about 2%-3% of operating
revenues in the next three years, because it will likely continue its
conservative approach to borrowing. In our base-case scenario we assume that
the oblast will attract only a limited amount of medium-term bank loans that
will mature in two to three years.
In 2012 the oblast borrowed commercial debt for the first time in several
years in order to refinance maturing budget loans, and it will start repaying
the RUB1.7 billion bank loan in small installments already in December 2012.
We expect that the oblast will withdraw another RUB2 billion in late 2012 or
early 2013 for liquidity purposes from a RUB7 billion bank line that was
organized in September 2012 and matures in 2015, and will organize new
committed credit facilities in 2013.
At the same time we expect that throughout 2013, the oblast's average cash
reserves will equal about RUB4.5 billion, which will exceed its low debt
service by more than 100%.
The stable outlook reflects our view that Chelyabinsk Oblast's modest revenue
growth and the need to increase operating spending in 2013-2015 will be
mitigated by management's conservative financial policies and will result in a
continuously sound budgetary performance, low debt, and a positive liquidity
We could take a negative rating action within the next 12 months if
weaker-than-forecast tax revenues and loosened control over operating
expenditures--in line with our downside scenario--lead to a deterioration of
the oblast's budgetary performance. Our downside scenario assumes deficits
after capital accounts of about 7% of total revenues and increasing borrowing
needs that could push tax-supported debt above 30% of consolidated operating
revenues in 2013-2015.
We could take a positive rating action if higher-than-forecast revenues and
the management's adherence to strict fiscal discipline resulted in
consistently sound budgetary performance and led to a structural consolidation
of the oblast's liquidity position, with the view to reducing the oblast's
exposure to financial and cash volatility in line with our upside scenario.
However, ratings upside is unlikely for the next 12 months, in our view.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit
Portal, unless otherwise stated.
-- Public Finance System Overview: Russian System For Regional
Governments Is Developing And Unbalanced, Nov. 12, 2012
-- Banking Industry Country Risk Assessment: Russia, March 19, 2012
-- Methodology For Rating International Local And Regional Governments,
Sept. 20, 2010
-- Methodology And Assumptions For Analyzing The Liquidity Of Non-U.S.
Local And Regional Governments And Related Entities And For Rating Their
Commercial Paper Programs, Oct. 15, 2009