(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
loans and to extend the maturity of existing budget loans; to
debt limits on the regions; and to provide additional financial
current transfers. The size of any additional debt limits has
Also among the proposals is providing federal government
subnational debt, although the scope of any guarantees and the
which they would be implemented is unclear. We would consider
debt guarantees as
credit positive for the regions, the majority of which are rated
sovereign ('BBB'/Negative). Debt of the regions accounts for one
Russia's general government debt of 12% of GDP, and is already
factored into the
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.
presidential decree to increase salaries to public sector
employees to bring
them in line with the average regional salary (from May 2012)
spending burdens on the regions. Combined with a contraction in
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
deficit in 2014-2016, as expenditure increases and tax revenues
growth remains weak. Without additional measures, we forecast
further growth in
the regions' total direct risk of 20% in 2014. Negative rating
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
We will examine Russian subnationals' debt metrics in more
detail in a Special
Report on the sector, which will be published this week.
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The above article originally appeared as a post on the Fitch
Wire credit market
commentary page. The original article can be accessed at
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