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Fitch Affirms Russia's Republic of Udmurtia at 'B+'; Outlook Stable
October 20, 2017 / 8:26 PM / a month ago

Fitch Affirms Russia's Republic of Udmurtia at 'B+'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW, October 20 (Fitch) Fitch Ratings has affirmed the Russian Republic of Udmurtia's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'B+' with Stable Outlooks and Short-Term Foreign-Currency IDR at 'B'. The region's senior unsecured debt ratings have been affirmed at 'B+'. The affirmation reflects Fitch's unchanged baseline scenario regarding Udmurtia's weak budgetary performance and high levels of debt over the medium term. The Stable Outlook assumes no significant deterioration in the republic's credit metrics in 2017-2019. KEY RATING DRIVERS The 'B+' ratings reflect the republic's persistently weak operating performance, which is insufficient to cover interest expenses, and a long track record of high deficit, which has led to high levels of debt. The ratings also take into account a developed industrial economy and a weak institutional framework for Russian sub-nationals. Fitch projects Udmurtia's weak budgetary performance will stabilise with a moderate recovery from a period of negative operating balances and large budget deficits. We expect an operating margin of a low 5% in the medium term (averaged -0.6% in 2012-2016), which is still insufficient to cover high interest expenses, reflecting the prolonged structural imbalances of the republic's budget. Udmurtia's 8M17 performance was in line with Fitch's expectations. The republic has collected 66% of its full-year budgeted revenue and incurred 64% of its budgeted expenditure, which resulted in an intra-year surplus of RUB0.9 billion. We expect an acceleration of expenditure in 4Q17, leading to a full-year deficit of about RUB6.2 billion or 9.8% of total revenue. This is in line with 2016 actuals (RUB7.2 billion or 11.3%) and an improvement compared with the 2012-2015 average annual deficit of RUB7.6 billion or 14.6%. In 1H17, republic's tax revenue increased 9% yoy on 5% growth in corporate income tax (CIT), 7% growth in personal income tax (PIT) and 38% growth in excise duties. The CIT and PIT increases were broadly distributed across sectors. Udmurtia's key tax contributing oil sector saw a slight decrease in tax revenue, due to stable production and the negative effect of rouble appreciation on its finances. Excise duties grew significantly as a result of increases in rates and production of alcohol beverages. We expect direct risk to increase towards 100% of current revenue by end-2019 (2016: 81%), driven by the expected budget deficit. Udmurtia's debt portfolio is weighted towards market debt, which constituted 56% as of 1 September 2017. It includes four bond issues with five- to 10-year maturity and bank loans. The rest are budget loans at a subsidised interest rate of 0.1%. During 8M17 the republic has significantly eased refinancing pressure by refinancing 65% of its outstanding debt. The administration contracted a RUB15 billion budget loan with a five-year tenor and reached agreements with banks (mainly state-controlled Sberbank) to receive RUB17 billion of bank loans with maturity in 2020. As a result debt repayment is now concentrated in 2020-2022 when 69% of debt matures. The weighted average life of its debt improved to 5.3 years from 3.5 years. Currently only 17% of total outstanding debt is due in 2017-2019, which is low compared with other Russian LRGs. As of 1 September 2017, its remaining 2017 maturities totalled RUB5 billion (RUB3.8 billion budget loans and RUB1.2 billion bonds), which will be rolled over with new bank loans. The republic's liquidity position is sound with cash totaling RUB1.8 billion on 1 September 2017 (RUB145 million as of end-2016). Year-end liquidity will likely be much lower due to year-end payments under capex contracts. Immediate refinancing risk is mitigated by RUB4 billion of undrawn bank credit lines and a stand-by credit line of RUB4.6 billion from The Russian Treasury. The republic has a developed industrial economy focused on the oil extraction, metallurgy, machine-building and military sectors. This helps smooth the impact of business cycles and keeps Udmurtia's wealth metrics in line with the national median. In 2016 the republic's GRP grew 3.2%, better than the wider Russian economy (down 0.2%). According to the republic's administration, the local economy will grow 1%-2% in 2017-2019. Fitch projects Russia's GDP will return to growth of 2% in 2017. Fitch views the republic's credit profile as being constrained by the weak Russian institutional framework for sub-nationals, which has a shorter record of stable development than many of its international peers. The predictability of Russian local and regional governments' budgetary policy is hampered by the frequent reallocation of revenue and expenditure responsibilities within government tiers. RATING SENSITIVITIES Stabilisation of direct risk at below 70% of current revenue and sustainable improvement of the operating balance that is sufficient to cover interest payments could lead to an upgrade. Inability to curb continuous growth of total indebtedness, accompanied by an increase in refinancing pressure and a negative operating balance, would lead to a downgrade. Contact: Primary Analyst Alexey Kobylyanskiy Analyst +7 495 956 99 80 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Konstantin Anglichanov Director +7 495 956 99 94 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 local and regional governments comparable internationally for analytical purposes: - Transfers of capital nature received were re-classified from operating revenue to capital revenue. - Transfers of capital nature made 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. 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