December 15, 2017 / 9:26 PM / a year ago

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

(The following statement was released by the rating agency) MOSCOW, December 15 (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+'. KEY RATING DRIVERS The 'B+' ratings reflect the region's high direct risk resulting from an ongoing structural deficit, high refinancing risk, 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 grants. Fitch forecasts Kostroma's direct risk will remain high and could approach 110% of current revenue by 2019 (2016: 106%) as the region will likely continue to record budget deficits in 2017-2019. Kostroma is among the most indebted Russian regions rated by Fitch. At end-11M17 the region's direct risk amounted to RUB21.8 billion (2016: RUB21.3 billion) and is forecast to end this year at RUB22.9 billion, according to Fitch's base case scenario. The high debt is partly mitigated by the material low-cost budget loans as a share of total debt (end-November 2017: 34%), which results in savings on interest expenses. Fitch expects that Kostroma will continue to benefit from ongoing state support over the medium term. The region plans to contract a new RUB5.1 billion loan from the federal budget. Additional support should come from a debt restructuring programme recently announced by the federal government. According to the programme, the maturity of most budget loans will be lengthened to seven years from the current two-to-five years. This will provide temporary relief to the region in refinancing pressure. Kostroma is exposed to material refinancing risk stemming from short-term borrowings. At end-November 2017, about 60% of direct risk (RUB13.4 billion) was bank loans due in 2018, which makes the region dependent on access to local debt markets to refinance maturing debt and exposes it to interest rate volatility. Kostroma plans to issue up to RUB8 billion five-year bonds to refinance bank loans, which should smooth its debt repayment schedule. Under its base case scenario, Fitch projects Kostroma to return to a positive current balance of 3%-4% of current revenue over the medium term after having been in negative territory in 2014-2016. This will be driven by improved operating performance and contained interest expenses due to a higher share of low-cost budget loans in its debt structure and lower interest rates on the Russian capital market following cuts to the key rate by the Russian Central Bank. At end-10M17, Kostroma recorded a RUB1.3 billion interim deficit, which is in line with Fitch's expectation. We project year-end deficit of RUB1.9 billion, which corresponds to about 8% of expected total revenue in 2017. This is an improvement from the region's performance in 2013-2016 when the budget deficit was 10%-18%. However, the deficit is still material and will drive further debt growth as fiscal performance remains volatile. Kostroma's economic profile is weaker than the average Russian region, with a gross regional product (GRP) per capita at 74% of the national median in 2015. This results in the region's below-average fiscal capacity and material reliance on financial aid from the federal budget, which represents about 30% of the region's operating revenue. Based on the region's estimates GRP will see marginal 0.9% growth in 2017 (2016: 0.6%) and 2%-2.5% growth in 2018-2020, which is in line with Fitch's Russian GDP growth forecast of 2% in 2018-2019. 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:; 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 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. 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