June 9, 2017 / 8:14 PM / in 9 months

Fitch Affirms Russia's Altai Region at 'BB+'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW, June 09 (Fitch) Fitch Ratings has affirmed Russian Altai Region's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BB+', and Short-Term Foreign-Currency IDR at 'B'. The Outlooks on the Long-Term IDRs are Stable. KEY RATING DRIVERS The ratings reflect Fitch's expectation that Altai will maintain sound budgetary performance and low indebtedness over the medium-term. The ratings also take into account below-national average wealth metrics of the local economy, Altai's modest fiscal capacity and as well as a weak institutional framework for Russian sub-nationals. Fitch forecasts a sound operating balance of 13%-15% of operating revenue over the medium term. Operating performance materially improved in 2016, when the region's operating margin soared to 20.7% from a 7.6% average during 2012-2015. This was driven by the government's tight cost control leading to a 6% decline in operating expenditure while operating revenue grew 10%. Revenue growth was mainly driven by exceptionally high proceeds from corporate income tax and excises in 2016. This came on the back of favourable changes in excise rates on oil-refinery products and higher profits in the financial sector and processing industry. We expect tax revenue to decline in 2017 due to changes in tax regulation and elimination of the base effect. However, overall operating revenue should still demonstrate modest growth due to an increase of federal transfers. Exceptionally strong fiscal performance led to a surplus before debt variation of 5.7% of total revenue in 2016 after a modest deficit averaging 2.3% in 2012-2015. Based on our expectation of a lower operating balance and high capex, we forecast a budget deficit of about 2% of total revenue in 2017. However, the forecasted deficit will be fully covered by the region's available cash. Historically the region's debt has been low, with subsidised federal budget loans being the sole debt instrument since 2007. Altai's direct risk accounted for a low RUB2.2 billion or 2.8% of current revenue in 2016, while cash balance was strong at RUB6.7 billion, leading to a positive net cash position. We expect Altai's direct risk to remain low by national and international standards, corresponding to higher-rated peers. In Fitch's view, despite a high number of public sector entities (PSEs) the government's oversight of the regional public sector companies is adequate, limiting Altai's exposure to material contingent risk. The region's contingent liabilities are limited to a single outstanding guarantee (for a negligible RUB4.7 million at end-2016) and the moderate indebtedness of its PSEs. Fitch assesses Altai's economy as weak by international standards due to the region's low economic output per capita. Its 2015 gross regional product (GRP) per capita was 63% of the national median. This is in part due to the high proportion of agriculture and food processing in the local economy. A modest tax base resulted in a below-median fiscal capacity and high dependence on transfers from the federal budget. The latter averaged 45% of operating revenue in 2011-2016. The region'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 their international peers. Weak institutions lead to lower predictability of Russian LRGs' budgetary policies, which are subject to continuous reallocation of revenue and expenditure responsibilities within government tiers. RATING SENSITIVITIES Consolidation of the region's strong budgetary performance with a sustained operating margin of about 15% while maintaining low direct risk could lead to upgrade. A downgrade could result from significant deterioration in operating performance, coupled with a significant increase in the region's overall risk. Contact: Primary Analyst Vladimir Redkin Senior Director +7 495 956 2405 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Victoria Semerkhanova Associate Director +7 495 956 9965 Committee Chairperson Guido Bach Senior Director +49 69 768 076 111 Fitch has made a number of adjustments to the official accounts to make LRGs internationally comparable for analytical purposes. These adjustments include: - Transfers of capital nature received were re-classified from operating revenue to capital revenue; - Transfers and other expenditure of capital nature disbursed 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. 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 WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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