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Fitch Affirms Novosibirsk Region at 'BBB-'; Outlook Stable
April 7, 2017 / 4:14 PM / 4 months ago

Fitch Affirms Novosibirsk Region at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW, April 07 (Fitch) Fitch Ratings has affirmed the Russian Novosibirsk Region's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB-' and Short-Term Foreign-Currency IDR at 'F3'. The Outlooks on the Long-Term IDRs are Stable. The region's outstanding senior unsecured domestic bonds have been affirmed at 'BBB-'. The affirmation reflects Fitch's unchanged base case scenario regarding the region's satisfactory budgetary performance with a narrowed deficit before debt variation and moderate debt with eased refinancing pressure. KEY RATING DRIVERS The 'BBB-' ratings reflect the region's moderate direct risk, satisfactory fiscal performance with an improved operating balance and narrowed deficit as well as a broad tax base stemming from a well-diversified economy. The ratings also factor in the region's limited fiscal flexibility amid a weak institutional framework for Russian sub-nationals. Fitch forecasts the region will maintain an operating balance of about 10% of operating revenue over the medium term after it improved to 9.4% in 2016, from an average 5.5% in 2013-2015. This will be supported by moderate growth of tax proceeds and continued control over operating expenditure, which is likely to remain rigid. Tax revenue is the major source of the region's revenue and historically contributed 80%-85% of operating revenue. In 2016, tax revenue increased 19.5% (2015: 9%) due to an expanding income and property tax base, restored profitability in the financial sector and a higher share of excises allocation to the regional budget. We project Novosibirsk Region to record a small deficit before debt variation of about 2% of total revenue in 2017-2019. In 2016, the region materially narrowed deficit to a marginal 0.3%, from an average 13% in 2013-2015. This was supported by an improved operating balance and reduced capex to below 10% of total expenditure from an average 18% in 2013-2015. We expect the region will maintain low capex and will not commence large infrastructure projects over the medium term as its government has committed to stabilising its debt levels. Fitch projects the region's direct risk will remain below 50% of current revenue in 2017-2019 (2016: 42%). In 2016, direct risk slightly increased to RUB47.9 billion (2015: RUB46.7 billion) but this growth was mitigated by reduced refinancing pressure. In 2016, Novosibirsk refinanced its short-term bank loans with a RUB10.4 billion three-year budget loan and issued RUB5 billion five-year domestic bonds. As a result, 30% of direct risk maturities were shifted to 2019-2021 while direct debt fell to RUB29.9 billion (2015: RUB36.8 billion). Nevertheless, Novosibirsk remains exposed to some refinancing risk as its debt maturity profile is short by international standards and about 70% of the maturities are concentrated in 2017-2019. In 2017, Novosibirsk needs to refinance RUB11.2 billion of debt, which is sufficiently covered by RUB14.2 billion undrawn credit lines and a RUB2 billion budget loan. Additional funding may come from RUB5 billion bonds, which the region plans to issue in 2017. 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% in 2015 and 0.8% in 2016. Fitch projects Russia's economy to start recovering in 2017 and its GDP to grow 1.4%-2.2% per year in 2017-2018. The administration expects the region's economy will follow the national trend and forecasts GRP growth of 1%-2.8% annually in 2017-2019. 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. RATING SENSITIVITIES An upgrade is subject to a sovereign upgrade accompanied by an improved operating balance of the region of 15% of operating revenue and a debt payback (direct risk/current balance) being in line with the average maturity of the region's debt portfolio. Consistently weak budgetary performance leading to deterioration of the debt payback ratio to above 10 years or a sovereign downgrade would lead to negative rating action. Contact: Primary Analyst Elena Ozhegova Director +7 495 956 24 06 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Vladimir Redkin Senior Director +7 495 956 24 05 Committee Chairperson Guido Bach Senior Director +49 69 768076 111 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. 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 _id=1021877 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 <a href="https://www.fitchratings.com">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. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT <a href="https://www.fitchratings.com/site/regulatory">HTTPS://WWW. FITCHRATINGS.COM /SITE/REGULATORY. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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