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Fitch Affirms Russia's Kirov Region at 'BB-'; Outlook Stable
June 16, 2017 / 8:17 PM / 6 months ago

Fitch Affirms Russia's Kirov Region at 'BB-'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW, June 16 (Fitch) Fitch Ratings has affirmed Russian Kirov 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 'BB-' ratings reflect the region's growing direct risk, fragile operating performance and modest economic indicators amid a weak Russian institutional framework. The ratings also factor in consolidation of the region's fiscal performance with a narrowing deficit before debt variation and continuous support from the federal government in the form of low-cost budget loans and transfers. Fitch projects Kirov Region's operating balance will be at 4%-5% of operating revenue in 2017-2019 (2016: 3.4%), which will remain sufficient to cover interest payments. This will be supported by higher current transfers from the federal budget due to favourable changes in the formula of federal grant calculation amid expected stagnation of tax revenue. In 2015-2016, Kirov Region gradually restored its operating balance to record a small positive current balance as its government kept operating expenditure (opex) almost unchanged with strict cost control measures. Fitch forecasts the region will further narrow its deficit before debt variation to about 3% of total revenue in 2017-2019 by maintaining growth of opex below that of operating revenue and postponing material capital expenditure. Kirov Region had gradually shrunk its deficit to 6% in 2016 from a peak of 14.3% in 2013. The region's government is committed to a balanced budget in 2017-2019, driven by requirements imposed by the Ministry of Finance as a condition for budget loan grants to the region. However, Fitch does not expect the balanced budget target to be met given slow growth of operating revenue and limited expenditure flexibility. We expect deficit shrinkage to be gradual, which could call for additional support from the federal government as the region's fiscal capacity remains low. Kirov's tax-raising ability is limited by the modest size of the regional tax base and low autonomy in setting tax rates. Most expenditure is social-oriented and therefore rather rigid, while capital expenditure has already been cut back towards 10% of total expenditure. Fitch forecasts the region's direct risk will gradually increase to RUB30 billion by end-2019 from RUB26 billion at end-2016, but remain almost stable relative to current revenue (2016: 65%). Debt burden is high relative to national peers; however, the risk is mitigated by material low-cost budget loans (about 60% of risk at end-2016) as a share of total debt, which helps the region to save on interest expenses. Remaining debt consists of one-to three- year bank loans, which amounted to a moderate 26.5% of current revenue at end-2016. The region remains exposed to refinancing risk due to its short-term debt repayment schedule and low cash balance (end-2016: RUB231 million). It leaves the region dependent on access to debt markets to refinance maturing debt. About 97% of its direct risk is due in 2017-2019. By end-2017, Kirov needs to repay RUB7.9 billion, which consists almost entirely of bank loans. The region plans to fund its refinancing needs with RUB3.6 billion contracted but undrawn credit lines and a RUB0.8 billion budget loan. The remaining funding needs will be covered by new credit lines the region plans to attract in 2H17. Kirov's economic profile is weaker than the average Russian region. Its gross regional product (GRP) per capita was 65% of the national median in 2015. However, the economy is diversified and its major taxpayers are spread across various sectors. The 10-largest taxpayers contributed less than 20% of Kirov's tax revenue in 2016. Based on the region's estimates, GRP contracted 1.8% in 2016 (2015: 0.8%), in line with the national economic trend, and will likely demonstrate close to zero growth in 2017-2019. The recovery of Russia's economy with expected GDP growth of 1.4%-2.2% in 2017-2018, according to Fitch forecasts, would be supportive of the local economy. 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 An improvement in the operating margin towards 10%, coupled with a debt payback ratio (direct risk-to-current balance) of around 10 years (2016: 103) on a sustained basis, could lead to an upgrade. The inability to maintain a positive operating margin on a sustained basis or an increase in direct risk above 80% of current revenue could lead to a downgrade. Contact: Primary Analyst Elena Ozhegova Director +7 495 956 2406 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Vladimir Redkin Senior Director +7 495 956 2405 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 the LRG comparable internationally for analyses purposes. For Kirov 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#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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