(The following statement was released by the rating agency)
Aug 21 - Fitch Ratings has affirmed the Russian City of Kazan’s Long-term foreign and local currency ratings at ‘B+', Short-term foreign currency at ‘B’ and National Long-term rating at ‘A(rus)'. The Outlooks on the Long-term ratings are Negative. The rating actions also affect Kazan’s outstanding bonds.
The Negative Outlooks reflect the agency’s on-going concern about the city’s high, short-term refinancing risk as the city needs to payback about RUB10bn by end-2012. The ratings also take into account concern about the city’s high direct risk, the improving budgetary performance, well-diversified local economy and potential support from the Republic of Tatarstan (‘BBB-'/Stable/‘F3’).
The agency notes that a failure to roll over RUB6.4bn of budget loans from Tatarstan maturing in October 2012 would lead to a downgrade.
The city’s direct risk is 2x higher than budgeted operating revenue in 2012. Fitch expects Kazan’s direct risk to stabilise at about RUB30bn in 2012-2013. The city’s direct risk increased to RUB30.5bn in 2011 from RUB10.2bn at the beginning of 2010. This is due to about RUB20bn of budget loans contracted by the city during 2010 and 2011 for road modernisation in preparation for Universiade, an international student sports competition, to be held in Kazan in 2013.
A high proportion of matured budget loans will put Kazan’s modest budget under pressure in H212. In October 2012, the city needs to repay RUB6.4bn of budget loans (about 42% of forecasted operating revenue), which it cannot do without support from the Republic of Tatarstan. If the republic does not roll over the loans, Kazan’s creditworthiness will come under serious pressure. Kazan also has a RUB0.8bn domestic bond maturing in December 2012 and RUB2.9bn short-term bank loans.
Fitch forecasts narrowing of the deficit before debt variation to total about RUB2.3bn in 2012 (2011: RUB9.2bn) as the city will complete its investment programme linked to Universiade. The deficit will be fully financed by outstanding cash, accumulated by end-2011, so Fitch does not expect a further increase in direct risk.
Fitch expects Kazan’s budgetary performance to stabilise in 2012-2014 with an operating margin in the range of 6%-8%. The city’s operating performance improved notably in 2011, with the operating margin soaring to 12% from negative 1.7% in 2010. The current margin turned to positive 7.7% for the first time since 2009. The improvement was driven by tax revenue growth of almost RUB2.4bn, driven by an increase in property tax due to tax base recalculation and CIT increase due to salary growth.
The city’s economy is well diversified, with a strong industrial sector dominated by petrochemicals, machine-building and food processing. The city’s economy gradually recovered in 2010-2011 with average annual economic growth of 4.6% yoy after a 2.5% decline in 2009. The administration expects stable economic development, with economic growth averaging 5% yoy in 2013-2014.
Kazan has 1.14 million inhabitants and is located in the central area of the Russian Federation on the East European Plain, 797km from Moscow. The city is the capital of Tatarstan, one of the most developed Russian regions.