October 27, 2017 / 8:33 PM / 3 years ago

Fitch Affirms Russia's Stavropol Region at 'BB'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW, October 27 (Fitch) Fitch Ratings has affirmed the Russian Stavropol Region's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BB' with a Stable Outlook and Short-Term Foreign-Currency IDR at 'B'. The region's senior debt long-term rating has been affirmed at 'BB'. The affirmation and Stable Outlook reflect Fitch's unchanged baseline scenario regarding expected consolidation of the region's sound operating performance, stabilisation of debt metrics and a narrowing budget deficit over the medium-term. KEY RATING DRIVERS The 'BB' ratings reflect Stavropol's track record of satisfactory budgetary performance with an operating balance more than covering interest payments and moderate debt with a high proportion of low-cost budget loans. The ratings also take into account persistent refinancing pressure, below the national median of socio-economic metrics and a weak institutional framework for Russian subnationals. Fitch expects the operating balance will consolidate at 11%-13% of operating revenue in 2017-2019 (2016: 11.2%), supported by moderate expansion of the tax base on the back of Russia's economic recovery and an increase of current transfers from the federal budget. The latter is mostly the result of a new approach to general-purpose grants allocation, which will increase 30% yoy for Stavropol in 2017. During 8M17 Stavropol has collected 66% of its revenue budgeted for the full year and incurred only 57% of its full-year budgeted expenditure, which resulted in an interim budget surplus of almost RUB6 billion. However, Fitch projects that seasonal acceleration of expenditure in 4Q17 will likely turn the positive interim result into a moderate full-year deficit of close to 2.5% of total revenue. Fitch also expects only small budget deficits before debt in 2018-2019 while the administration aims to balance its budget, which will limit the region's borrowing requirements. Fitch expects the region's direct risk will stabilise at around 45% of current revenue over the medium-term. During 8M17 the region's direct risk decreased to RUB28 billion from RUB38.5 billion. Low-cost budget loans dominated total debt at 60% as of 1 September 2017; issued debt represented another 30% while the remainder was bank loans. As with most of its national peers, Stavropol remains exposed to refinancing pressure with 66% of maturities due in 2017-2019. The weighted average life of debt at three years as of 1 September 2017 was lower than the region's direct risk-to-current balance ratio of 5.5 years in 2016. Positively, the region replaced costly bank loans due in 2018-2019 with low-cost budget loans, which will result in material interest savings. Moreover, parts of the region's budget loans will be restructured with more favourable repayment terms according to a recent federal government decision. The refinancing needs for end-2017 amount to a low RUB1.5 billion and could easily be covered by liquidity, including RUB14.2 billion of unutilised credit lines as of 1 September 2017. Stavropol's socio-economic profile is historically weaker than that of the average Russian region. Its economy is dominated by agriculture, food processing and the chemicals industry. Its GRP per capita in 2015 was 66% of the national median. The region's administration expects the local economy will start to recover gradually in 2017 after a period of contraction in 2015-2016. Fitch expects the Russian economy will grow 2% in 2017, and similar growth for the region. Russia's institutional framework for subnationals is a constraint on the region's ratings. Frequent changes in both the allocation of revenue sources and the assignment of expenditure responsibilities between the tiers of government limit Stavropol'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 and extending its debt repayment profile that leads to the direct risk-to-current balance ratio moving towards the weighted average life of the region's debt could lead to an upgrade of Stavropol. A consistently weak operating balance that is insufficient to cover interest expense, coupled with an increase in direct risk above 60% of current revenue, 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 24 05 Committee Chairperson Guido Bach Senior Director +49 69 768076 111 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. 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