Fitch: Proposals Would Not Reverse Russian Regions' Debt Rise

Mon May 19, 2014 1:00am EDT

(The following statement was released by the rating agency) LONDON, May 19 (Fitch) Proposals by Russia's President to ease the growing debt service burden of Russian subnationals could contain but not reverse the decline in the sector's debt metrics, Fitch Ratings says. Among the recommendations that the President made this week are to reduce the cost of borrowing by replacing market funding with subsidised federal budget loans and to extend the maturity of existing budget loans; to impose additional debt limits on the regions; and to provide additional financial aid through current transfers. The size of any additional debt limits has not been specified. Also among the proposals is providing federal government guarantees for subnational debt, although the scope of any guarantees and the mechanism by which they would be implemented is unclear. We would consider debt guarantees as credit positive for the regions, the majority of which are rated below the sovereign ('BBB'/Negative). Debt of the regions accounts for one third of Russia's general government debt of 12% of GDP, and is already factored into the sovereign rating. Overall, these measures could limit interest expenses following a recent sharp increase in the regions' debt stock. Another presidential proposal is to review the method of calculating the average regional salary, which could ease pressure on regional finances. The presidential decree to increase salaries to public sector employees to bring them in line with the average regional salary (from May 2012) imposed additional spending burdens on the regions. Combined with a contraction in the corporate income tax base following changes in tax regulations, this has led to operating balance deterioration, driving debt increases. But while they might contain future debt growth, the proposed measures would not undo the significant increase in direct risk (comprising bank loans, bonds, and federal budget loans) of 29% seen last year. The regional government budget deficit rose to 1% of GDP in 2013, twice as large as the federal government deficit and a marked increase compared with an average of 0.3% of GDP in 2008-2012. We expect the regions to face a structural fiscal deficit in 2014-2016, as expenditure increases and tax revenues stagnate as growth remains weak. Without additional measures, we forecast further growth in the regions' total direct risk of 20% in 2014. Negative rating actions could continue if the deterioration in credit metrics continues. A federal government decision on whether to adopt the Presidential proposals is due by 1 August 2014, in time for the start of the next budget cycle in September. We will examine Russian subnationals' debt metrics in more detail in a Special Report on the sector, which will be published this week. Contact: Vladimir Redkin Senior Director International Public Finance +7 495 956 9901 Fitch Ratings CIS Ltd 26 Valovaya St. Moscow, 115054 Victoria Semerkhanova Associate Director International Public Finance +7 495 956 9965 Mark Brown Senior Director Fitch Wire +44 20 3530 1588 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. 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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