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Fitch Affirms Russia's Novosibirsk Region at 'BBB-'; Outlook Negative
October 14, 2016 / 8:21 PM / a year ago

Fitch Affirms Russia's Novosibirsk Region at 'BBB-'; Outlook Negative

(The following statement was released by the rating agency) MOSCOW, October 14 (Fitch) Fitch Ratings has affirmed the Russian Novosibirsk Region's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BBB-', Short-Term Foreign Currency IDR at 'F3' and National Long-Term Rating at 'AA+(rus)'. The Outlooks on the Long-Term IDRs are Negative and the Outlook on the National Long-Term Rating is Stable. The region's outstanding senior unsecured domestic bonds have been affirmed at 'BBB-' and 'AA+(rus)'. The affirmation reflects Fitch's unchanged base case scenario regarding the region's satisfactory budgetary performance and moderate debt. The Negative Outlook reflects that on Russia's sovereign rating (BBB-/Negative). KEY RATING DRIVERS The affirmation reflects the region's moderate, although growing, direct risk, satisfactory fiscal performance and a broad tax base stemming from a well-diversified economy. The ratings also factor in the region's weakened liquidity and volatile debt portfolio management, exposing the region to occasional refinancing risk. In its base case scenario Fitch expects Novosibirsk Region to continue to report satisfactory fiscal performance with an operating margin of 8%-10% over the medium term (2011-2015: average 9%). This is supported by expected moderate operating revenue growth (3.5%-5.5% p.a. in 2016-2018) and continued control over operating expenditure. At the same time the region's opex is likely to remain rigid with the proportion of inflexible staff costs and current transfers averaging at 90% over 2011-2016. We also expect continued shrinkage in the region's deficit before debt to 4%-6% of total revenue in 2016-2018, from 10.6% at end-2015 (2014: 12%), supported by decreasing capex. The region posted an interim surplus of 4% of total revenue by end-August 2016. We therefore expect gradual improvement in the region's self-financing capacity on capex, of which 55%-70% will be covered by the region's current balance and capital revenue in the medium term (2013-2015: average 36.5%). Fitch expects the region's direct debt (bonds and bank loans) to remain moderate over the medium term, at about RUB40bn (2015: RUB36.8bn), or below 40% of current revenue by end-2018 (2015: 36.5%). The region's direct risk as of 1 September 2016 was RUB41.3bn, of which 68% were low-cost budget loans from the federal government, followed by domestic bonds (26%) and bank loans (6%). Fitch assesses Novosibirsk Region's immediate refinancing risk as immaterial following a recent issue of five-year domestic bonds. This significantly relieved the region's pressure to refinance bank loans of RUB2.8bn or 7% of currently outstanding direct risk by end-December 2016. Additionally, refinancing risk has decreased after the region substituted a portion of its bank loans with medium-term budget loans. Fitch expects the region's payback period (direct debt/current balance) to improve to about six years in 2018, from eight years in 2015. The region's own liquidity remains weak as its interim cash holdings were low at RUB47m at end-August 2016. For liquidity support purposes the region resorts to short-term treasury lines, repayable to the federal treasury within the same fiscal year. The region's credit profile is constrained by the weak Russian institutional framework for local and regional governments (LRGs). It has a short track record of stable development compared with many of its international peers. The unstable intergovernmental set-up leads to lower predictability of LRGs' budgetary policies and hampers the region's forecasting ability, negatively affecting investment and debt policies. Novosibirsk Region's economic profile is well-diversified, with a large number of companies across various sectors, supporting a broad tax base. The negative macro-economic trend in Russia has led to a deceleration of the local economy, which contracted 2.2% in 2015, but still outperformed the national economy, which dropped 3.7%. The administration expects slower the local economy to contract at a slower pace of 0.8% in 2016, before recovering to 1%-2% growth in 2017-2019. RATING SENSITIVITIES Consistently weak budgetary performance leading to deterioration of debt coverage (direct debt/current balance) to above 10 years or a sovereign downgrade would lead to negative rating action. Contact: Primary Analyst Konstantin Anglichanov Director +7 495 956 956 99 94 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Vladimir Redkin Senior Director +7 495 956 99 01 Committee Chairperson Christophe Parisot Managing Director + 33 1 44 29 91 34 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Fitch has made a number of adjustments to the official accounts to make the LRG internationally comparable for analytical purposes. These adjustments include: - 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. 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