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Fitch Affirms Russia's Chuvash Republic at 'BB+'; Outlook Negative
December 9, 2016 / 5:09 PM / a year ago

Fitch Affirms Russia's Chuvash Republic at 'BB+'; Outlook Negative

(The following statement was released by the rating agency) MOSCOW, December 09 (Fitch) Fitch Ratings has affirmed Russian Chuvash Republic's (Chuvashia) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB+' and National Long-Term Rating at 'AA(rus)' with Negative Outlooks, and Short-Term Foreign Currency IDR at 'B'. The republic's outstanding senior unsecured domestic bond ratings have been affirmed at 'BB+' and 'AA(rus)'. The affirmation reflects Fitch's unchanged base case scenario regarding the republic's satisfactory fiscal performance and still moderate debt. The Negative Outlook reflects our expectations that debt metrics will weaken due to growing direct risk amid continuing budget deficit. KEY RATING DRIVERS The 'BB+' rating reflects Chuvashia's moderate, but growing, direct risk as well as satisfactory, albeit weakened, budgetary performance compared with the historical average. The ratings also take into account a well-diversified local economy, which has decelerated following the national economic downturn, and a weak institutional framework for Russian sub-nationals. Fitch expects the republic's direct risk will grow to finance a continuing budget deficit, to 50% of current revenue in 2017, which will not be commensurate with the current 'BB+' rating. However, the adverse effect of this increase is partly mitigated by the region's material reliance on low-cost budget loans. We expect the proportion of budget loans to remain above 50% at end-2016, versus 62% at end-2015. Refinancing pressure on the budget will persist over the medium term, with 78% of direct risk maturing during 2017-2018. In the near term refinancing needs for 2016 are limited to the repayment of RUB0.4bn budget loans (4% of total outstanding). Undrawn credit lines with banks total RUB5bn, which fully cover the region's refinancing needs for 2016-2017. Fitch projects the republic's budgetary performance will remain satisfactory with a 7%-8% operating margin over the medium term, but below the 13.9% reported in 2013. We forecast the deficit before debt variation will narrow to 5% of total revenue in 2016-2018 from 7.6% in 2015, largely due to capex cuts or postponement to later periods. During 9M16 Chuvashia collected 73% of full-year budgeted revenue, supported by stronger performance of taxpayers in chemical and financial sectors. Simultaneously, the republic incurred only 60% of budgeted expenditure, leading to an interim RUB3.9bn surplus. However, the surplus largely reflects the delayed execution of capex. We expect higher spending over 4Q to result in a full-year deficit of RUB1.9bn, or 5% of the region's full-year revenue (2015: RUB2.8bn). The republic's socio-economic profile is historically weaker than that of the average Russian region. Its per capita gross regional product was 35% lower than the national median in 2014. However, Chuvashia has a diversified industry-oriented economy with a broad tax base, i.e. the 10 largest taxpayers represent only 23% of tax proceeds. According to the administration's estimates, the republic's economy contracted 5.5% in 2015, worse than the 3.7% fall in national GDP. Fitch expects the Russian economy will contract 0.4% in 2016, which could negatively impact the republic's economic prospects. Russia's institutional framework for sub-nationals is a constraint on the republic's ratings. It has a shorter record of stable development than many of its international peers. The predictability of Russian LRGs' budgetary policy is hampered by frequent reallocation of revenue and expenditure responsibilities within government tiers. RATING SENSITIVITIES Sharp growth of direct risk to above 50% of current revenue, coupled with growing refinancing pressure and further deterioration of operating performance, could lead to a downgrade. Contact: Primary Analyst Alexey Kobylyanskiy Analyst +7 495 956 99 80 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Elena Ozhegova Associate Director +7 495 956 99 26 Committee Chairperson Guido Bach Senior Director +49 69 768 076 111 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. Fitch has made a number of adjustments to the official accounts to make LRGs comparable internationally for analytical purposes: - 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. 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 _id=1016228 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. 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. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. 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