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Fitch Affirms Russia at 'BBB-'; Outlook Stable
March 31, 2017 / 8:14 PM / 6 months ago

Fitch Affirms Russia at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, March 31 (Fitch) Fitch Ratings has affirmed Russia's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB-' with a Stable Outlook. The issue ratings on Russia's senior unsecured foreign- and local-currency bonds have also been affirmed at 'BBB-'. The Country Ceiling has been affirmed at 'BBB-' and the Short-Term Foreign-Currency and Local-Currency IDRs at 'F3'. KEY RATING DRIVERS Russia's ratings balance a strong sovereign balance sheet, robust external finances and an improved policy framework against weaker macroeconomic performance in relation to peers, structural weaknesses (commodity dependence and governance risks) and geopolitical tensions. Russia implemented a coherent and credible policy response to the sharp fall in oil prices. A flexible exchange rate, strong commitment to inflation targeting, fiscal consolidation and financial sector support have allowed the preservation of robust external and fiscal balance sheets, the economy to adjust to low oil prices and domestic confidence to return gradually. The inflation-targeting policy continues to gain traction. Average inflation more than halved to 7.1% in 2016 and fell to 4.6% in February 2017 due to tight monetary policy, favourable food prices and a stronger rouble. Fitch expects that the central bank will achieve its inflation target of 4% by mid-2017. The Central Bank of Russia intends to maintain low inflation by strengthening transmission mechanisms, cementing institutional credibility and sustainably anchoring expectations in line with the inflation target. The government has re-introduced three-year budgetary planning, having previously suspended it in 2015. The new framework targets a 1% of GDP deficit by 2019 based on a conservative USD40/b oil price assumption. A transitional fiscal rule commits the government to use excess oil revenues for deficit reduction, while the central bank will intervene in the FX market to prevent real effective exchange rate appreciation. The strengthened policy mix, if successfully executed, could deliver improved macroeconomic stability, fiscal consolidation, reduced dependency on oil revenues and rebuilding of external buffers. Fitch expects the federal government deficit to fall to 2.4% of GDP in 2017 and 1.4% in 2018, from 3.4% in 2016, on the back of increased oil revenues and a nominal freeze in expenditure levels, thus comfortably exceeding targets (3% and 2%, respectively) under the 2017-2019 budget. The fiscal plan targets a 3pp reduction of GDP expenditure driven by a decline in defence and social spending as well as a lower subsidy bill. Increases to current conservative oil price assumptions, failure to maintain expenditure discipline or reduced political support for the fiscal strategy could limit sustainable consolidation and the rebuilding of fiscal savings. Fitch expects Russia's public finances to remain strong versus 'BBB' peers, despite the execution risks to the fiscal strategy. General government debt, at an estimated 12.9% of GDP in 2016, is the lowest in the rating category. Fiscal savings in the Reserve Fund (RF) and National Wealth Fund declined to a combined USD88 billion (6.2% of GDP) at end-2016 from 10.3% of GDP at end-2015, reflecting the use of the RF for deficit financing and valuation effects. Fitch now expects the RF to be exhausted in 2018, instead of 2017, as higher oil revenues are likely to reduce the call on savings. Fiscal buffers remain low compared with other oil producers with similar ratings. Risks from the banking system for the sovereign balance sheet appear limited. Banks' capitalisation remains moderate, but pressure on it has reduced due to generally stabilised asset quality and improved profitability. Liquidity is strong in both local and foreign currencies. The central bank is focused on cleaning up the banking system and plans to strengthen the bank resolution framework, which is likely to reduce reliance on direct sovereign support. According to Fitch's estimates, Russia has directed RUB3.2 trillion (3.7% of 2016's estimated GDP) towards supporting its banking sector since 2014. Fitch expects the current account surplus to rise modestly over the forecast period to an average of 3% of GDP in 2017-2018, from 1.7% in 2016, as the recovery in domestic demand driving up imports will offset much of the positive impact of rising oil prices. Capital outflows are expected to remain moderate, reflecting an easier external debt repayment schedule and greater confidence in the domestic economy. International reserves rose to USD378 billion in 2016 (12.8 months of CXP) and to USD397 billion at end-February, from USD368 billion at end-2015. Continued current account surpluses, conditional FX intervention as part of the transitional fiscal rule and moderate capital outflows are forecast to drive reserve accumulation in 2017 and 2018. Russia currently has the highest external liquidity ratio in the 'BBB' category, and its net external creditor position has strengthened since 2014 in both GDP and CXR terms through the deleveraging of banks and corporates and greater exchange rate flexibility. The sovereign net foreign asset position is solid at 29% of GDP. Growth is reviving, but will remain weak relative to peers. Growth is forecast to pick up to 1.4% in 2017 and 2.2% in 2018, from -0.2% in 2016, due to reduced uncertainty, monetary policy easing, exchange rate stability and a supportive oil price environment. This compares with forecast growth of 2.9% for the 'BBB' category. The authorities are working on reforms to ease the impact of adverse demographic dynamics, reduce informality, and improve productivity to lift potential growth from 1-1.5%. Nevertheless their implementation and potential impact on the economy is unlikely to materialise before the 2018 presidential election. The presidential election is scheduled for March 2018 and incumbent President Vladimir Putin is in a comfortable position to win a new term in office given high approval ratings and limited evidence of a competitive opposition. Russia's ranking in the World Bank governance indicators is well below the peer median. In Fitch's opinion, Russia has a more active foreign policy than rating peers, thus exposing it to geopolitical tensions. Fitch does not anticipate any material change in EU and US sanctions over the medium term. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Russia a score equivalent to a rating of 'BBB-' on the Long-Term FC IDR scale. Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LTFC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. Nonetheless, the following risk factors could, individually or collectively, trigger positive rating action: - The rebuilding of fiscal and external savings buffers, for example through a sustained recovery in oil prices. - Adherence to ongoing fiscal reforms and commitment to a credible medium-term fiscal framework that supports improved macroeconomic stability. - Implementation of structural reforms that would boost potential growth. The following risk factors could individually or collectively, trigger negative rating action: - A weakening of the policy framework that undermines macroeconomic and fiscal performance. - A sharp decline in international reserves. - A rise in geopolitical tensions or imposition of significantly tougher sanctions. KEY ASSUMPTIONS Fitch assumes that EU and US sanctions remain in place over the medium term, but are not tightened significantly. Fitch forecasts Brent crude to average USD52.5/b in 2017 and USD55/b in 2018. Contact: Primary Analyst Erich Arispe Director +44 20 3530 1753 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Paul Gamble Senior Director +44 20 3530 1623 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 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 Country Ceilings (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1021504 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. 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