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Fitch Affirms Russia's Chuvash Republic at 'BB+'; Outlook Negative
June 10, 2016 / 4:10 PM / 2 years ago

Fitch Affirms Russia's Chuvash Republic at 'BB+'; Outlook Negative

(The following statement was released by the rating agency) MOSCOW, June 10 (Fitch) Fitch Ratings has affirmed the Russian Chuvash Republic's (Chuvashia) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB+', with Negative Outlooks, and Short-Term Foreign Currency IDR at 'B'. The agency has also affirmed the republic's National Long-Term Rating at 'AA(rus)' with a Negative Outlook. The republic's outstanding senior unsecured domestic bond ratings have been affirmed at 'BB+' and 'AA(rus)'. The affirmation reflects the republic's stable key credit metrics over the past six months, although the Negative Outlook reflects Fitch's expectations that debt metrics will weaken due to growing direct risk amid continuing budget deficit. KEY RATING DRIVERS The 'BB+' rating reflects Chuvashia's moderate, but growing, direct risk as well as satisfactory, albeit weakened, budgetary performance compared with the historical average. The ratings also take into account a nationwide economic downturn, which could negatively influence the republic's financials and a weak institutional framework for Russian sub-nationals. Fitch expects the republic's direct risk to grow towards 52% of current revenue by end-2018, due to continuing budget deficit, from 42% in 2015 and 34% in 2014. However, the adverse effect of this increase is partly mitigated by structural improvement to the region's debt profile. The proportion of market debt decreased to 38% of total outstanding at end-2015, from 73% at end-2014, following the receipt of RUB6.3bn loans from the federal budget, which the region had used to refinance short-term bank loans. The budget loans have a three-year maturity and carry negligible interest rates, which will help the republic to save on interest payments. Fitch projects the republic's budgetary performance will remain satisfactory with a 7%-8% operating margin over the medium term. In 2015, the operating balance increased to 8.4% of operating revenue in 2015 from 7.6% in 2014, which is still below the 13.9% seen in 2013. The improvement was due to cost optimisation by the administration as well as higher corporate income tax (up 9.6% yoy) and excise duties (up 16.1% yoy). Fitch expects the budget deficit to narrow to 5% in 2016-2018 from 7.6% in 2015, driven by cuts in capital spending and control over opex. Refinancing pressure on the budget will persist over the medium term as the region will have to repay about 89% of its direct risk during 2016-2018. In the near term refinancing needs for 2016 are limited to the repayment of RUB0.2bn amortising bonds and RUB3.3bn budget loans (of which RUB2.5bn are short-term treasury loans). Undrawn credit lines with banks total RUB11.3bn, which cover the region's 2016 refinancing needs by 3x. The republic's socio-economic profile is historically weaker than that of the average Russian region. Its per capita gross regional product was 35% lower than the national median in 2014. However, Chuvashia has a diversified industry-oriented economy with a broad tax base, ie the 10 largest taxpayers represent only 23% of tax proceeds. According to the administration's estimates, the republic's economy contracted 5.5% in 2015, worse than the 3.7% fall in national GDP. Fitch expects the Russian economy will contract 0.7% in 2016, which could negatively impact the republic's economic prospects. Russia's institutional framework for sub-nationals is a constraint on the republic's ratings. Frequent changes in the allocation of revenue sources and in the assignment of expenditure responsibilities between the tiers of government hampers the forecasting ability of local and regional governments in Russia. RATING SENSITIVITIES Sharp growth of direct risk to above 50% of current revenue, coupled with growing refinancing pressure and further deterioration of operating performance, could 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 Elena Ozhegova Associate Director +7 495 956 99 01 Committee Chairperson Guido Bach Senior Director +49 69 768 076 111 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. Fitch has made a number of adjustments to the official accounts in order to make the LRG comparable internationally for analytical purposes. For Chuvashia 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. 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 _id=1005903 Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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