October 20, 2017 / 8:21 PM / a year ago

Fitch Affirms Russia's Mari El Republic at 'BB'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW, October 20 (Fitch) Fitch Ratings has affirmed the Russian Mari El Republic's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BB' with Stable Outlooks and Short-Term Foreign-Currency IDR at 'B'. The agency has also affirmed the republic's outstanding senior debt at 'BB'. The affirmation reflects Fitch's view regarding the republic's stable fiscal performance and moderate direct risk with some refinancing pressure. The ratings also factor in the modest budget of Mari El, its socio-economic metrics that are below the national median and a weak institutional framework for Russian subnationals. KEY RATING DRIVERS Fitch expects Mari El to record stable fiscal performance in 2017-2019, with an operating margin of 12%-14% (2016: 14.1%). This will be underpinned by cost control measures, gradual tax revenue growth in line with an expected recovery of the Russian economy and ongoing transfers from the federal government. We expect that the republic's tax capacity will remain below the national average and federal transfers will constitute a significant proportion of Mari El's budget, averaging about 40% of revenue annually in 2017-2019. The modest size of the republic's budget and local economy results in a lower self-financing ability to absorb potential shocks than 'BB' rated national peers. This makes the republic's budget highly dependent on financial support from the federal government. Mari El's 8M17 performance was in line with Fitch's expectations. The republic has collected 72.7% of its full-year budgeted revenue and incurred 72% of its full-year budgeted expenditure, which resulted in a small intra-year surplus of RUB84 million. We expect moderate acceleration of expenditure in 4Q17, which should lead to a full-year deficit of about RUB140 million or 0.5% of total revenue. This compares with 2016's RUB320 million deficit or 1.4% and an even larger average annual deficit of RUB2 billion or 9.3% in 2012-2015. The narrowing budget deficit is attributed to an improved capital balance following cuts to capex. The latter accounted for 15.1% of total expenditure in 2016, and Fitch expects further capex reduction to 12% in 2017, down from an average of about 20% in 2011-2015. We project the republic will keep its budget close to balance in the medium term, given restrictions imposed on its debt stock and budget deficit by the Ministry of Finance in return for financial support. The republic's direct risk has remained almost unchanged since the beginning of the year and totaled RUB13.5 billion at 1 September 2017. Fitch forecasts direct risk will moderately increase to RUB13.8 billion or 60.3% of current revenue at end-2017 (2016: 62.6%). As a share of current revenue it will likely gradually decline to 58% in 2018-2019. During 1H17, Mari El tapped the domestic bond market by issuing RUB2 billion bonds with a final maturity in 2024, which have lengthened the republic's maturity profile and eased immediate refinancing risk. As of 1 September 2017, its debt consisted of medium-term bank loans (48%), followed by low-cost budget loans from the federal government (38%) and outstanding bonds (16%). Mari El's immediate refinancing needs - a RUB670 million budget loan due in 2017 - are fully covered by accumulated cash (RUB851 million at 1 September). However, refinancing risk exists over the medium term. The debt maturity profile stretches to 2034, but more than 50% of the risk, mostly bank loans, is concentrated in 2018-2019. This results in a weighted average life of its debt of about four years, which is short by international comparison, and means the republic may be dependent on capital markets to refinance its maturing debt. Mari El's socio-economic profile is historically weaker than the average Russian region, which restricts the republic's tax base. Fitch expects a moderate recovery of the national economy of 2%-2.2% per year in 2017-2018 and that Mari El's economy will follow this trend. Russia's institutional framework for subnationals is a constraint on the republic's ratings. Frequent changes in both the allocation of revenue sources and the assignment of expenditure responsibilities between the tiers of government limit Mari El's forecasting ability and negatively affect the republic's strategic planning, as well as debt and investment management. RATING SENSITIVITIES Maintaining its sound operating performance, coupled with an extension of the debt repayment profile resulting in the direct risk payback (direct risk-to-current balance) ratio moving towards the weighted average life of debt, could lead to an upgrade. Conversely, weak budgetary performance with a close to zero current margin accompanied by direct risk increasing above 70% of current revenue could lead to a downgrade. Contact: Primary Analyst Vladimir Redkin Senior Director +7 495 956-2405 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Victoria Semerkhanova Associate Director +7 495 956-9965 Committee Chairperson Raffaele Carnevale Senior Director +39 02 87 90 87 203 Fitch has made a number of adjustments to the official accounts to make the local and regional government internationally comparable for analytical purposes. These adjustments include: - Transfers of capital nature received were re-classified from operating revenue to capital revenue; - Transfers of capital nature disbursed were re-classified from operating expenditure to capital expenditure. - Goods and services of capital nature were re-classified from operating expenditure to capital expenditure. 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 on www.fitchratings.com Applicable Criteria International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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