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Fitch Affirms Russian Chelyabinsk Region at 'BBB-'; Outlook Stable
April 7, 2017 / 4:13 PM / 8 months ago

Fitch Affirms Russian Chelyabinsk Region at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW, April 07 (Fitch) Fitch Ratings has affirmed Russian Chelyabinsk Region's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB-' with Stable Outlook and affirmed the Short-Term Foreign-Currency IDR at 'F3'. The affirmation reflects Fitch's unchanged baseline scenario regarding Chelyabinsk's sound budgetary performance and strong credit metrics over the medium term. KEY RATING DRIVERS The 'BBB-' ratings reflect the region's low level of debt and sound current balance, which provide a debt payback ratio below the region's average debt maturity, and an industrialised economy. The ratings also take into account the region's high contingent liabilities and a weak institutional framework for Russian sub-nationals. Chelyabinsk Region continued to demonstrate sound operating results on a sustained basis. The region's operating performance improved as operating margin increased to 9.5% (2015: 8.4%) despite a fall in gross regional product (GRP) in 2016. The region also recorded a budget surplus before debt at 0.3% of total revenue in 2016 (2015: deficit of 1%). The budget balance was supported by a strong tax base (taxes constituted 82% of operating revenue in 2016), cuts in capital expenditure (decreased to 10.5% of total expenditure in 2016 from 12.2% in 2015) and operating expenditure restraint. Fitch forecasts Chelyabinsk Region will maintain a sound operating balance at about 8% of operating revenue in 2017-2019. Its industrialised economy, which is focussed on steel and machine-building, will gain from a forecast economic recovery in Russia. Fitch projects Russia's GDP will return to growth at 1.4% in 2017. Fitch expects a pick-up in capex as the region starts its infrastructure renovation cycle, leading to a projected modest deficit of 1%-2% over the medium term and, consequently, mildly growing debt. In 2016 the region's direct risk further decreased to 10.7% of current revenue (2015: 13.1%), while the debt payback ratio improved to a strong 1.2 years from 1.7 years, which is below the region's average debt maturity (3.8 years as of 1 March 2017), indicating structural financial sustainability. The regional administration used accumulated cash reserves to pay down the most expensive loans, capturing saving on interest expenses. Fitch projects the region's direct risk will increase mildly over the medium term but to remain below 15% of current revenue. Chelyabinsk's refinancing risk remains low due to historically low debt, a favourable debt structure and access to federal loans. As of 1 March 2017, budget loans constituted 69% of the debt portfolio, while the rest was three-year bank loans. Outstanding maturities for 2017 total RUB1.3 billion (10% of current revenue), which are fully covered by a new budget loan of RUB1.8 billion. The region's liquidity position remained strong with cash totalling RUB1.9 billion on 1 March 2017. Additionally, the region has an arrangement with the Treasury of Russia to use up to RUB9.3 billion of low-cost short term loans (0.1% annual interest rate). The region has continued the active use of guarantees as an economic tool to incentivise local producers. The guarantees have started to amortise, as they fell to RUB14.6 billion in 2016 from RUB17.6 billion in 2015. The largest guarantee of RUB8 billion was issued to a Chelyabinsk pipe rolling plant, which is among the leading pipe producers in Russia. Fitch projects gradual amortisation of issued guarantees, and for net overall risk to stabilise at 20%-25% of current revenue by 2019 (2016: 22.7%). So far, no guarantees have been called by lenders. Chelyabinsk Region has a well-developed industrialised economy with a focus on the metallurgical and machine-building sectors, supporting wealth metrics above the national median. The tax base is slightly concentrated, with the top 10 taxpayers accounting for about 26% of tax revenue in 2016. This exposes the region's revenue to volatility and to economic cycles. GRP fell 4.5% in 2016, which is worse than the wider Russian economy (a 0.2% fall). According to the region's administration, the local economy should return to sluggish annual growth of 1%-2% in 2017-2019. Fitch views the region'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 As the region's ratings are at the same level as Russia's, positive changes to the sovereign ratings could be positive for the region's ratings, provided the region's budgetary resilience also strengthens, leading to a sustained operating margin above 15% while debt remains low. A downgrade of the sovereign ratings or sharp growth of total indebtedness (including contingent liabilities) to above 50% of current revenue or a weak operating balance at below 5% of operating revenue 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 Victoria Semerkhanova Associate Director +7 495 956 99 65 Committee Chairperson Guido Bach Senior Director +49 69 768076 111 Fitch has made a number of adjustments to the official accounts in order 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:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on 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=1021873 Solicitation Status here Endorsement Policy here 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 WEB SITE AT <a href="">WWW.FITCHRATINGS.COM.. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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