Fitch Affirms Chuvash Republic at 'BB+'; Outlook Stable

Fri Jul 25, 2014 4:22pm EDT

(The following statement was released by the rating agency) LONDON/MOSCOW/FRANKFURT, July 25 (Fitch) Fitch Ratings has affirmed Russian Chuvash Republic's (Chuvashia) 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 region's National Long-term rating at 'AA(rus)' with Stable Outlook. Chuvash Republic's RUB2bn outstanding senior unsecured domestic bonds have also been affirmed at 'BB+' and 'AA(rus)'. KEY RATING DRIVERS The affirmation reflects the recovery of the region's operating performance, with indicators above Fitch's expectations, and its low direct risk and contingent liabilities. The ratings also take into account the moderate scale of the regional economy, refinancing pressure in the medium-term and an evolving institutional framework. Fitch expects Chuvashia's operating balance to be stable at 13% of operating revenue in 2014-2016. Its operating balance recovered to a sound 13.9% of operating revenue in 2013 after having fallen to 4.9% in 2012. The recovery was supported by the administration's ability to contain operating expenditure growth. The republic recorded a minor deficit before debt variation of 1.9% of total revenue in 2013 (2012: 5.2%). The deficit was fully financed by accumulated cash reserves, thus enabling the republic to contain the growth of direct risk. Fitch expects direct risk will remain low in the medium term and stabilise at around 30% of current revenue. In 2013, the region's direct risk declined to 27% of current revenue from 30.8% a year ago. The maturity profile of the direct risk extends to 2032 but most of the repayments are concentrated in the medium term. The republic will have to redeem 59% of its direct risk between 2014 and 2016, which creates some refinancing pressure. So far, the republic has redeemed RUB1.5bn of amortising loans and RUB1.6bn of short-term bank loans in 2014. This has reduced Chuvashia's direct risk to RUB5.5bn as of 20 July 2014 from RUB8.6bn at the beginning of the year. Refinancing risk for the rest of 2014 is low, with only RUB200m of federal loans facing maturity. The region's contingent risk remains low. Guarantees issued by the republic decreased to RUB1.1bn so far in 2014 from RUB1.4bn in 2013. The debt of public-sector entities remains stable at RUB0.7bn, and is well controlled by the administration. The republic's socio-economic profile is historically weaker than that of the average Russian region. Its per capita gross regional product was 29% lower than the national median in 2012. However, Chuvashia has a diversified industry-oriented economy. According to the administration's preliminary estimates, the republic's economy stagnated in 2013 on the back of unfavourable national economic trends. The administration expects the regional economy to recover and grow by an average 2%-3% in 2014-2016. Russia's institutional framework for subnationals constrains the region's ratings. Frequent changes in allocation of revenue sources and assignment of expenditure responsibilities between the tiers of government limit the region's forecasting ability and negatively affect its fiscal capacity and financial flexibility. RATING SENSITIVITIES A positive rating action may result from the operating margin being restored to the historical high of above 15%, along with direct risk at below 40% of current revenue. Sharp growth of direct risk to above 50% of current revenue, coupled with an inability to ease refinancing pressure and deterioration of operating performance resulting in weak debt coverage, could lead to a downgrade. Contact: Primary Analyst Victoria Semerkhanova Associate Director +7 495 956 99 65 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Vladimir Redkin Senior Director +7 495 956 70 64 Committee Chairperson Guido Bach Senior Director +49 69 768076 111 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. Additional information is available at www.fitchratings.com. Applicable criteria, 'Tax-Supported Rating Criteria', dated 14 August 2012, and 'International Local and Regional Governments Rating Criteria outside United States', dated 23 April 2014, are available on www.fitchratings.com. 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