September 22, 2017 / 8:16 PM / a year ago

Fitch Affirms Yaroslavl Region at 'BB-'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW, September 22 (Fitch) Fitch Ratings has affirmed Russian Yaroslval Region's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB-' and Short-Term Foreign Currency IDR at 'B'. The Outlook is Stable. The region's senior debt ratings have been affirmed at long-term local currency 'BB-'. KEY RATING DRIVERS Fitch projects Yaroslavl's operating margin will gradually improve to 3%-5% in 2017-2018 (2016: 2%) and further to 6% in 2019, which will then be sufficient to fully cover interest payments. Financial flexibility remains weak, despite the region's interim deficit shrinking to 1.7% of total revenue by end-7M17. Nonetheless, Fitch forecasts that the deficit before debt variation will persist over the medium term, albeit narrowing to 3.5%-6.5% of total revenue from 8.4% in 2016. We expect fiscal performance to be supported by continued increase in the region's taxation, albeit at a slower rate of 2%-2.5% in 2017 after a 7.8% rise in 2016. Taxes on average represented 88% of Yaroslavl's operating revenue in 2012-2016. Expenditure is historically rigid, with inflexible spending items (salaries and current transfers of all kinds) averaging at 93.3% of total expenditure in 2012-2016. As a result pressure from operating expenditure is likely to persist over the medium-term. Fitch expects direct risk will continue to increase to 75% of current revenue in 2017-2019, from 38% at end-2012. However, Yaroslavl's debt burden should remain consistent with the region's ratings. Interim direct risk stabilised at RU35.6 billion as of 1 August 2017 (2016: RUB35.6 billion or 69% of current revenue). The composition of the interim debt stock changed in favor of domestic bonds (51% of total debt vs. 35% in 2016), followed by low-cost federal budget loans (46%), while bank loans dropped to 3% from 24% in 2016. The region's immediate refinancing risk is somewhat immaterial with 10% of its current debt stock scheduled to mature by end-2017 as a result of tapping the debt capital market and budget loans. Yaroslavl is a frequent issuer and the administration expects a tap issue of up to RUB2.5 billion bonds in 2H17 in addition to the RUB7.5 billion 10-year bonds issued in May 2017. Recently issued bonds have improved the maturity profile of the region's debt portfolio to 4.6 years (2016: 3.6 years). A well-diversified local economy helps keep wealth metrics in line with the national median. Various sectors of the processing industry provide the region with a broad tax base. The top 10 taxpayers contributed 36% of Yaroslavl's tax revenue in 2015-2016. In 2016, the region's gross regional product grew 1.2%, versus the Russian economy's 0.4% fall. According to the administration's restated base macro-forecast 3.6% economic growth is projected in 2017, before rising to 4%-4.5% in 2018-2019. The region's credit profile remains constrained by the weak institutional framework for Russian local and regional governments (LRGs), which has a shorter record of stable development than many of the region's international peers. The predictability of Russian LRGs' budgetary policy is hampered by frequent reallocation of revenue and expenditure responsibilities between government tiers. RATING SENSITIVITIES An improvement in the operating balance towards 10% of operating revenue, coupled with debt coverage ratio (direct risk-to-current balance) at around 10 years (2016: negative 14 years) for a sustained period could lead to an upgrade. Inability to restore a positive current balance and widening of the deficit above 10% of total revenue could lead to a downgrade of the ratings. Contact: Primary Analyst Konstantin Anglichanov Director +7 495 956 9994 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Alexey Kobylyanskiy Analyst +7 495 956 9980 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 LRG comparable internationally for analysis purposes. For Yaroslavl these adjustments include: - 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. 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