December 16, 2016 / 6:16 PM / a year ago

Fitch Affirms Russian Kostroma Region at 'B+'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW, December 16 (Fitch) Fitch Ratings has affirmed Russian Kostroma Region's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'B+', National Long-Term Rating at 'A-(rus)' and Short-Term Foreign Currency IDR at 'B'. The Outlook on the Long-Term Ratings is Stable. Kostroma region's outstanding senior unsecured domestic bonds have also been affirmed at 'B+' and 'A-(rus)'. The affirmation reflects Fitch's unchanged base case scenario regarding the region's continuous direct risk growth and expected improvement of operating performance over the medium term. KEY RATING DRIVERS The 'B+' ratings reflect Kostroma's high direct risk, modest economic indicators and a weak institutional framework for Russian sub-nationals. The ratings also reflect the region's material proportion of low-cost budget loans, our expectation of a narrowing budget deficit and an improving operating margin. Fitch projects Kostroma's direct risk will reach 105% of current revenue by end-2018 (2015: 97%), due to expected continuing budget deficits. Direct risk amounted to RUB19.6bn at 1 November 2016, moderately up from RUB17.7bn at end-2015. The region is among the most indebted Russian regions and its debt metrics are weaker than the 'B+' peer median. Direct debt will likely remain moderate at 67% (2015: 56%) of current revenue as we expect the region will continue to benefit from ongoing state support in the form of low-cost budget loans. We project the proportion of budget loans will remain high at about 40% of direct risk in 2016-2018. As with most Russian regions, Kostroma is exposed to refinancing risk, which stems from its reliance on one-year bank loans. The region's debt repayment schedule is concentrated in 2017-2018, when 80% of direct risk is due, including RUB7.2bn bank loans, RUB4.2bn budget loans and RUB0.9bn of domestic bonds. Kostroma is considering issuing long-term domestic bonds in 2017 to re-finance maturing bank loans, which will lengthen its debt maturity profile and diversify its funding sources. We forecast Kostroma's deficit before debt variation will gradually narrow to 6%-7% of total revenue over 2016-2018 from a high average 14% in 2013-2015, due to extensive cost-cutting in operating and capital expenditure. We expect the region to follow the strict cost control policy imposed by the Ministry of Finance as a condition for granting state support to the regional government. Performance for 10M16 was in line with our expectation. Kostroma has collected 83% of its budgeted revenue and incurred 81% of its planned expenditure for the year. This resulted in an intra-year deficit of RUB2.5bn and Fitch forecasts a full-year deficit of RUB2.1bn in 2016 as the bulk of capex was already implemented during the year. Fitch projects that Kostroma's operating balance will further improve to 5%-7% of operating revenue in the medium term, from 2.9% in 2015 and 0.2% in 2014. However, the operating balance improvement will not be sufficient to cover increasing interest expenses, leading to a continuing negative current balance over the medium term. The region's fiscal flexibility remains low. Its tax-raising ability is limited by the modest size of the region's tax base and limited autonomy in setting tax rates. Operating revenue is weighed down by a sluggish national economy, while most of Kostroma's expenditure is social-oriented and, hence, rather rigid. The region's economic profile is weaker than the average Russian region. Gross regional product (GRP) per capita was 77% of the national median in 2014 (latest available data). Based on the region's estimates GRP continues to decline by 0.6% in 2016 (2015: 4.6% decline), in line with the national economic trend. The regional administration expects the local economy to return to mild GRP growth in 2017. Russia's institutional framework for sub-nationals is a constraint on the region's ratings. Frequent changes in the allocation of revenue sources and in the assignment of expenditure responsibilities between the tiers of government hamper the forecasting ability of local and regional governments (LRGs) in Russia. RATING SENSITIVITIES Improvement in the operating balance towards 10% of operating revenue and stabilisation of direct risk below 100% of current revenue on a sustained basis could lead to an upgrade. Inability to curb debt growth, accompanied by persistent refinancing pressure and a negative operating balance, would lead to a downgrade. Contact: Primary Analyst Vladimir Redkin Senior Director +7 495 956 2405 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Alexey Kobylyanskiy Analyst +7 495 956 99 80 Committee Chairperson Guido Bach Senior Director +49 69 768076 111 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Fitch has made a number of adjustments to the official accounts to make the LRG comparable internationally for analyses purposes. For Kostroma 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. 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