Fitch Affirms Russia's Republic of Khakassia at 'BB'; Outlook Stable

Fri May 16, 2014 11:38am EDT

(The following statement was released by the rating agency) LONDON/MOSCOW/FRANKFURT, May 16 (Fitch) Fitch Ratings has affirmed the Russian Republic of Khakassia's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB', with Stable Outlooks, and its Short-term foreign currency IDR at 'B'. The agency has also affirmed the republic's National Long-term rating at 'AA-(rus)' with a Stable Outlook. The republic's outstanding senior unsecured domestic bonds (ISIN RU000A0JU8R1 and RU000A0JSQR7) of RUB4.2bn have also been affirmed at 'BB' and 'AA-(rus)'. KEY RATING DRIVERS The affirmation reflects Khakassia's still adequate budgetary performance with operating balance fully covering interest payment, its moderate - albeit increasing - direct risk with smooth maturity profile and low contingent liabilities. The ratings also factor in high tax concentration, although the distribution of the top 10 taxpayers across three industries mitigates sudden tax revenue shock in one particular sector. Fitch expects Khakassia to report stable budgetary performance in 2014-2016 with operating balance at about 6% of operating revenue. The operating balance deteriorated in 2013 to 4% from 10% a year earlier, driven by contraction of the tax base due to low market prices in the coal industry over the last two years. Operating expenditure will continue to be under pressure in the medium term due to the federal government's decision to raise public sector salaries and fund other social programmes. Fitch estimates Khakassia's deficit before debt variation will narrow to 9% of total revenue in 2014-2016 from 20% in 2013 on the gradual restoration of tax revenue and steady transfers from the federal government. Given the republic's limited cash reserves, the agency expects the deficit to be fully covered by new debt. The significant deficit in 2013 was caused by increased capital transfers to municipalities and by significantly lower tax revenue. Fitch now expects a much sharper increase in the republic's direct risk to 70% of current revenue by end-2016, compared with 45% previously. In 2014 the republic plans to issue a RUB2.5bn seven-year bond to fund the deficit and to partially refinance maturing bank loans. The region's direct risk rose to 50% in 2013 (2012: 26%) and was composed of bank loans (26%), domestic bonds (53%), and budget loans (21%). Debt servicing coverage (direct debt servicing/operating balance) significantly deteriorated in 2013 to 327% (2012: 115%) and approached the lower end of the current rating. Fitch expects refinancing pressure to remain moderate in the medium term, due to the republic's smooth debt maturity profile. Khakassia relies mostly on three-year bank loans and seven-year domestic bonds. In 2014 the republic faces maturing debt of RUB2.4bn, which corresponded to 25% of direct risk as at 1 April 2014. Such refinancing risk is mitigated by RUB1.4bn available committed credit lines with commercial banks. Contingent risk remains moderate and is limited to the debt of few public sector entities and guarantees issued by the republic. Fitch assesses as prudent the republic's ability to control contingent risk stemming from its public sector and issued guarantees. Khakassia's tax base is strong, but concentrated in a few companies in the mining, non-ferrous metallurgy and hydro-power generation sectors. The 10 largest taxpayers contributed 44.1% to the republic's tax revenue in 2013 (2012: 52.3%). Taxes provided 71% of operating revenue in 2013. Khakassia's creditworthiness remains constrained by the institutional framework for local and regional governments (LRGs) in Russia. The predictability of Russian LRGs' budgetary policy is hampered by frequent reallocation of revenue and expenditure responsibilities between the tiers of government. RATING SENSITIVITIES Inability to restore debt servicing coverage to 100%, coupled with inability to narrow deficit before debt variation to less than 10% of total revenue for two consecutive years, would be negative for the ratings. A positive rating action, although unlikely in the near term, would result from consolidation of budgetary performance with an operating margin consistently above 10% and maintaining sound debt payback ratio (2013: 87.8 years) that matches average debt maturity (2013: 4.4 years) over the medium term. Contact: Primary Analyst Elena Ozhegova Associate Director +7 495 956 99 87 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Konstantin Anglichanov Director +7 495 956 99 94 Committee Chairperson Christophe Parisot Managing Director +33 1 44299 134 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable criteria, 'Tax-Supported Rating Criteria', dated 14 August 2012, and 'International Local and Regional Governments Rating Criteria outside the United States', dated 23 April 2014, are available on Applicable Criteria and Related Research: Tax-Supported Rating Criteria here International Local and Regional Governments Rating Criteria - Outside the United States here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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