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Fitch Affirms Russian Republic of Khakassia at 'B+'; Outlook Stable
October 20, 2017 / 8:22 PM / a month ago

Fitch Affirms Russian Republic of Khakassia at 'B+'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW, October 20 (Fitch) Fitch Ratings has affirmed Russian Republic of Khakassia's Long-Term Foreign- and Local Currency Issuer Default Ratings (IDRs) at 'B+' with a Stable Outlook. The Short-Term Foreign-Currency IDR has been affirmed at 'B'. Khakassia's outstanding senior unsecured domestic bonds have also been affirmed at 'B+'. The affirmation reflects Fitch's unchanged base-line scenario regarding the republic's high debt and weaker budgetary performance over the medium-term. The Stable Outlook reflects Fitch's expectation that the republic's credit metrics will not deteriorate further in 2017-2019. KEY RATING DRIVERS Khakassia's ratings reflect high direct risk at above 100% of current revenue, accompanied by persistent refinancing pressure, a long track record of large double-digit budget deficit and a concentrated local economy. The ratings also take into account satisfactory operating performance, which however has been undermined by high interest expenses, and an evolving institutional framework for Russian subnationals. Fitch expects the republic's direct risk will remain high at between 125% and 145% of current revenue in 2017-2019 (2016: 110.5%). During 9M17 the republic's direct risk further increased to RUB24.8 billion from RUB22.8 billion. The composition of the republic's direct risk differs unfavourably from that of its national peers, most of which rely heavily on subsidised federal budget loans. The share of budget loans in Khakassia's debt portfolio, which bear a 0.1% annual interest rate, remained low at 10% as of 1 September 2017. Refinancing pressure also remains high as close to 70% of total debt stock is due in 2017-2019 as of 1 October 2017. Positively, the republic has refinanced in advance costly bank loans that were due in December 2017 with new RUB4 billion bank loans. The new loans are due in 2019 and at lower interest rates, which limit immediate refinancing needs for 2017 to RUB1.4 billion. In 2018 the republic faces redemption of RUB7.5 billion, which corresponds to 30% of total direct risk. Fitch expects that the majority of debt due in 2018 will be refinanced by funding from the capital market. The republic will also receive a RUB4.7 billion budget loan in October-November 2017 from the federal government in return for some restrictions on the size of the republic's budget deficit and the volume of debt. The new five-year budget loan will extend the maturity of its debt profile and with its 0.1% annual interest rate ease pressure on interest expenses. Fitch expects the republic's budgetary performance will remain tight in 2017-2019, with operating balance being just enough to cover high interest expenses. Budget deficit before debt will likely remain in double-digits, but lower than the peak of 33% of total revenue in 2016. The republic plans to control operating spending and cut capital expenditure to 12%-14% of total spending in 2017-2019 from a high average 28% in 2015-2016. During 7M17, the administration recorded an interim deficit of RUB1.5 billion. We expect that seasonal acceleration of expenditure in 2H17 will widen the full-year deficit to account for around 15% of total revenue. Khakassia's wealth metrics are in line with the national median. However, the republic's economy is strongly concentrated in the hydro-power generation, mining and non-ferrous metallurgy sectors. The top 10 taxpayers contributed 46.1% to the republic's tax revenue in 2016 (2015: 49.5%). Taxes accounted for 74% of operating revenue in 2016, which makes the region's budget prone to volatility. Fitch forecasts Russia's national economy to recover 2% in 2017 (2016: contracted 0.2%), which in turn should spill over to Khakassia's economy and tax base. The republic'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 its international peers. Weak institutions lead to lower predictability of Russian LRGs' budgetary policies, which are subject to the federal government's continuous reallocation of revenue and expenditure responsibilities within government tiers. RATING SENSITIVITIES Continuous growth of direct risk, accompanied by an increase in refinancing pressure and a persistently negative current balance, would lead to a downgrade. Sustainable narrowing of the budget deficit leading to debt stabilisation, accompanied by easing refinancing pressure and an operating balance that is sufficient for interest payments, could lead to an upgrade. Contact: Primary Analyst Victoria Semerkhanova Associate Director +7 495 956 9901 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Alexey Kobylyanskiy Analyst +7 495 956 99 80 Committee Chairperson Christophe Parisot Managing Director + 33 1 44 29 91 34 Fitch has made a number of adjustments to the official accounts to make the LRG comparable internationally for analytical purposes, including - 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. 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. 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