June 16, 2017 / 8:22 PM / a month ago

Fitch Affirms Russian Kostroma Region at 'B+'; Outlook Stable

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(The following statement was released by the rating agency) MOSCOW, June 16 (Fitch) Fitch Ratings has affirmed Russian Kostroma Region's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'B+' and Short-Term Foreign Currency IDR at 'B'. The Outlook on the Long-Term IDRs is Stable. Kostroma Region's outstanding senior unsecured domestic bonds have also been affirmed at 'B+'. The affirmation reflects Fitch's unchanged base case scenario regarding the region's continuing direct risk growth and weak, albeit slightly improving, operating performance over the medium term. KEY RATING DRIVERS The 'B+' ratings reflect the region's high direct risk resulting from an ongoing structural deficit, high refinancing pressure, a modest regional economy and a weak Russian institutional framework. The ratings also reflect continuous support from the federal government in the form of low-cost budget loans and transfers. Fitch forecasts Kostroma's direct risk will remain high, which could reach 120% of current revenue by 2019 (2016: 106%) as the region will likely continue to record a budget deficit in 2017-2019. The region's direct risk increased to RUB21.3 billion at end-2016 from RUB17.7 billion at end-2015. Kostroma is among the most indebted Russian regions rated by Fitch, and its debt metrics are weak. The high debt levels are partly mitigated by the material low-cost budget loans as a share of total debt (40%), which help the region to save on interest payments. Under its base case scenario, Fitch expects the region will continue to benefit from ongoing state support over the medium term. Kostroma remains materially exposed to refinancing risk stemming from short-term bank loans. This leaves the region dependent on access to local debt markets to refinance maturing debt and exposed to interest rate volatility. Fitch expects debt servicing could account for a high 70% of current revenue in 2017 (2016: 49%). By end-2017, Kostroma needs to repay RUB11.8 billion, or 56% of its direct risk. The region has already contracted RUB3 billion one-year credit lines and plans to issue RUB8 billion five-year bonds by end-2017 to cover funding needs. The new bonds will somewhat mitigate refinancing risk and will help to reduce the annual debt service needs. Fitch projects Kostroma will consolidate its operating balance at about 5% of operating revenue over the medium term, after it improved to 4% in 2016 from an average 1.6% in 2014-2015. However, interest payments could exceed the operating margin, resulting in a negative current balance, which we forecast at -0.7% of current revenue in 2017 (2016: -2%). In 2016, the region's operating performance was supported by a 15% growth in tax revenue, mostly due to a recovery in the financial sector and higher excise revenue. Fitch expects the region's tax revenue growth to decelerate in 2017 on changes by the federal government to the allocation of corporate income tax and excises although this will be more than offset by higher current transfers from the federal budget. Kostroma is committed to shrinking its budget deficit and, hence, stabilising debt levels to comply with requirements imposed by the Ministry of Finance as a condition for granting budget loans to the region. We therefore project Kostroma will narrow its deficit before debt variation to 7%-10% of total revenue over the medium term from an average 15% in 2014-2016. Otherwise continued fiscal slippage would be negative for the ratings. We expect improvement to be gradual, which will likely call for additional support from the federal government as the region's fiscal capacity is limited. Tax-raising capacity is limited by the modest size of the region's tax base and low autonomy in setting tax rates. To meet the target, the region also has undertaken a number of cost-cutting measures, although flexibility is low as most expenditure is social-oriented and hence rigid. The region's economic profile is weaker than the average Russian region. Gross regional product (GRP) per capita was 74% of the national median in 2015. Based on the region's estimates GRP continued to decline 0.6% in 2016 (2015: 1.4% decline), in line with the national economic trend. The regional administration expects the local economy to return to mild GRP growth in 2017-2018. Russia's institutional framework for sub-nationals is a constraint on the region's ratings. Frequent changes in the allocation of revenue sources and in the assignment of expenditure responsibilities between the tiers of government hamper the forecasting ability of local and regional governments (LRGs) in Russia. RATING SENSITIVITIES Further growth of direct debt above 85% of current revenue (2016: 64%), accompanied by persistent refinancing pressure, would lead to a downgrade. An upgrade is unlikely unless direct risk falls below 100% of current revenue, accompanied by an improvement in the debt repayment schedule on a sustained basis. Contact: Primary Analyst Elena Ozhegova Director +7 495 956 24 06 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Konstantin Anglichanov Director +7 495 956 99 94 Committee Chairperson Guido Bach Senior Director +49 69 768076 111 Fitch has made a number of adjustments to the official accounts to make the LRG comparable internationally for analyses purposes. For Kostroma region 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. 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#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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