April 7, 2017 / 4:14 PM / 4 months ago

Fitch Revises Moscow Region's Outlook to Positive; Affirms at 'BB+'

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(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Moscow Region - Rating Action Report here MOSCOW, April 07 (Fitch) Fitch Ratings has revised Moscow Region's Outlook to Positive from Stable and affirmed the Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BB+' and Short-Term Foreign-Currency IDR at 'B'. Moscow Region's outstanding senior unsecured domestic bonds have been affirmed at 'BB+'. The revision of the Outlook to Positive reflects the improvement of the region's fiscal performance accompanied by sound debt metrics. KEY RATING DRIVERS The Outlook revision reflects the following rating drivers and their relative weights: HIGH Fitch forecasts Moscow Region will record a sound operating balance at 13%-15% of operating revenue in 2017-2019, supported by growing tax revenue, which contribute about 90% of operating revenue. The region's operating balance had been gradually improving over the last two years, to reach 16% in 2016, up from an average 10.2% in 2013-2015, as tax revenue growth outpaced operating expenditure growth. In 2016, tax revenue increased 14.6% (2015: 7%) due to an expanding tax base, restored profitability in the financial sector and higher excise proceeds. Fitch expects the region's self-financing capacity will remain strong over the medium term. Fitch projects a low deficit before debt of 1%-2% of total revenue in 2017-2019 after a surplus of 3.2% in 2016 and a balanced budget in 2015, as the region increases investment in infrastructure to 15% of total expenditure from 13% in 2016. About 90% of capex will be funded by the region's current balance and capital revenue (2015-2016: 100%) and new borrowing requirements will be low. Fitch expects the region's debt metrics will remain strong over the medium term. Under Fitch's base case scenario, the region's direct risk will not exceed 30% of current revenue in 2017-2019 (2016: 23.4%) and debt servicing (both interest and principal repayments) will be comfortably covered by the operating balance. In 2016, direct risk payback improved to 1.5 years from 2.1 years in 2015, supported by sound fiscal performance. This is well below the region's weighted average debt maturity, which we estimate to have totalled 3.3 years at end-2016. In 2016, the region's direct risk stabilised at RUB98.1 billion (2015: RUB98.4 billion). About half of the risk is bank loans while the remainder is almost equally split between bonds and budget loans. The region diversified its debt portfolio in 2016 by issuing RUB25 billion seven-year bonds, which extended 25% of its debt maturities to 2020-2023. Nevertheless, its debt maturity profile remains short by international standards with material concentration in 2017-2019, when 72% of the risk is due (RUB70.5 billion). In Fitch's view, the region's refinancing risk is moderate due to a low debt burden compared with the region's budget size and high RUB69.4 billion liquidity accumulated by Moscow Region on its accounts at end-2016. MEDIUM Moscow Region has a well-diversified economy based on services and processing industries. Proximity to the City of Moscow (BBB-/Stable/F3) supports the region's wealth and economic indicators, which are strong in the national context. According to the region's estimates, GRP increased 0.4% in 2016 after a 2.9% contraction in 2015. Fitch expects the national economy to recover in 2017 and projects Russia's GDP to grow 1.4%-2.2% per annum in 2017-2018, which will be positive for the region's economy. The regional government expects GRP will grow 1%-3.6% per year in 2017-2019. The region's ratings also reflect the following key rating drivers: Moscow Region directly and indirectly controls an extensive public sector, consisting of more than 100 companies, although their number has decreased over the last two years. This creates contingent risk for the regional budget through administrative expenses, current subsidies and potential demand on extraordinary support to the sector. At present, Fitch does not consider risk from the sector to be significant due to the large size of the region's budget and prudent debt practice, with no material guarantees provided to the public sector. The region's credit profile remains constrained by the 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 Maintaining a sound operating balance at above 10% of operating revenue, accompanied by sound debt metrics, with direct risk-to-current balance below average debt maturity could lead to an upgrade. Contact: Primary Analyst Elena Ozhegova Director +7 495 956 24 06 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Victoria Semerkhanova Associate Director +7 495 956 99 65 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 comparable internationally for analysis purposes. For Moscow Region these adjustments include: - 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. 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=1021876 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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