June 2, 2017 / 8:13 PM / in 5 months

Fitch Affirms Russian Belgorod Region at 'BB'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW, June 02 (Fitch) Fitch Ratings has affirmed Russian Belgorod Region's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BB' with Stable Outlook and Short-Term Foreign-Currency IDR at 'B'. The region's outstanding senior unsecured domestic debt has been affirmed at 'BB'. KEY RATING DRIVERS The ratings reflect sound operating performance, moderate, albeit growing, direct risk and a well-diversified economy. The ratings also take into account the region's exposure to contingent risk, limited fiscal flexibility, and a weak institutional framework for Russian subnationals. Fitch expects the region will continue to demonstrate sound budgetary performance with an operating balance above 10% of operating revenue. This will be supported by increasing corporate income tax on the back of improved financial results of the region's metallurgic sector. Operating margin strengthened to 12.1% in 2016 (2014-2015: average 10.8%) due to cuts in operating spending and a moderate 3% growth of tax proceeds. This offset the 12% decline of current transfers from the federal budget. The region's deficit before debt variation remained almost unchanged at 3.8% in 2016 (2015: -3.5%). Fitch projects the budget deficit will remain at 3% of total revenue in 2017-2019, underpinned by a sound operating balance and the stabilising capex. We expect capex to remain at a moderate 10%-12% of total expenditure in 2017-2019, unless Belgorod receives additional capital transfers from the federal government. Fitch expects the region's direct risk will remain moderate by international standards, at below 60% of current revenue over the medium-term. In 2016 the region's direct risk increased to 55.8% of current revenue from 52.2% a year before. Direct risk is dominated by domestic bonds, which comprise 53% of the total, followed by low-cost budget loans (31%). The reminder is medium-term bank loans. The region has a smoother and longer maturity profile than many national peers. Nevertheless, it remains concentrated with 63% of maturities due in 2017-2019. As of 1 April in 2017 the region had to refinance RUB6.3 billion, which represented 21% of its debt stock. Of this amount RUB4.6 billion are amortising domestic bonds while the remainder is federal budget loans. The region plans to issue new RUB4 billion domestic bond to refinance maturing obligations. The new bond is intended to have a seven-year maturity, which will contribute to lengthening the debt profile. The federal government distributed RUB2.5 billion of budget loans to the region in 2017, which will be enough for refinancing due debt in the current year. The region's contingent liabilities continue to decline but remain material. In 2016, contingent liabilities accounted for RUB9.5 billion or around 15% of current revenue versus 25% in 2014. Most of this are guarantees (RUB7 billion) that the region provided to support regionally important enterprises. In addition, Fitch views RUB4.8 billion of debt at state unitary enterprise Obldorsnab as direct risk as Belgorod subsidises the company for principal and interest payments on this loan. The region does not plan to issue new guarantees in 2017. The region has a well-diversified economy based on agriculture, mining and food processing, with GRP per capita at 135% of the national median in 2015. The regional economy outperformed the national economy with a CAGR of 2.9% versus 0.8%, respectively, in 2013-2015. Estimated GRP growth for 2016 is 3%, versus the national economic contraction of 0.2%. The region's credit profile remains constrained by a weak institutional framework for Russian local and regional governments (LRGs), which has a shorter record of stable development than many of its international peers. Weak institutions lead to lower predictability of Russian LRGs' budgetary policies, which are subject to the federal government's continuous reallocation of revenue and expenditure responsibilities within government tiers. RATING SENSITIVITIES Consolidation of sound budgetary performance with an operating margin above 10% accompanied by improvement of direct risk-to-current balance ratio to about five years (2016: seven years) could lead to an upgrade. Deterioration of budgetary performance leading to a consistently weak operating balance that is insufficient to cover interest expenses could lead to a downgrade. Contact: Primary Analyst Victoria Semerkhanova Associate Director +7 495 956 99 65 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 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 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. 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