Fitch Rates Russian Perm Region 'BBB-'; Outlook Stable
25 Nov 2016 12:10 PM
Link to Fitch Ratings' Report: Perm Region - Rating Action Report
Fitch Ratings-Moscow-25 November 2016: Fitch Ratings has assigned Russia's Perm Region Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of 'BBB-' and a Short-Term Foreign Currency IDR of 'F3'. The agency has also assigned the region a National Long-Term Rating of 'AA+(rus)'. The Outlooks on the Long-Term ratings are Stable.
The ratings reflect the region's low debt, sound operating performance, and a developed industrialised economy with above national-median wealth metrics. These strengths are balanced against a short debt maturity profile, a sluggish national economy and a weak institutional framework for Russian sub-nationals. The rating is on the same level as, but not constrained by, the Russian sovereign IDRs (BBB-/Stable/F3).
KEY RATING DRIVERS
The ratings reflect the following rating drivers and their relative weights:
Low Direct Risk
Fitch expects direct risk to remain at below 30% of current revenue over the medium-term. In 2015, direct risk accounted for 20.3%, and was almost equally split between short-term bank loans and subsidised federal budget loans. Fitch estimates debt payback (direct risk-to-current balance) at 3 to 3.5 years in 2016-2018 (2015: 3 years), which is slightly higher than the region's weighted average debt maturity of two years. Perm is considering issuing long-term domestic bonds in 2017 to finance certain investments, which will lengthen the debt maturity profile and diversify its funding sources.
Although Perm's absolute debt is low, refinancing needs are concentrated in 2016-2018, when the region has to repay 95% of total direct risk. This is mitigated by its debt being mostly subsidised budget loans at 0.1% interest cost. Of this RUB3.7bn are maturing by end-2016, which will be more than covered by available unutilised bank credit lines of RUB9.5bn.
Sound Budgetary Performance
Fitch expects the region will continue to demonstrate stable operating performance, supported by steady tax revenue and cost control measures. We forecast an operating balance at around 8% of operating revenue over the medium term (2015: 7.2%), which will fully cover debt servicing needs (interest and principal repayment). Capital spending restraint will maintain budget deficit before debt at a moderate 3%-4% of total revenue in 2016-2018 (2015: 3.9%).
The region has a developed industrial economy weighted towards the production of mineral fertilisers and oil-refinery. Its wealth metrics are above the Russian regional median, with GRP per capita at 26% above the median in 2014. However, overall concentration in a few industries, with the top 10 taxpayers accounting for about 35% of tax revenue in 2015, exposes the region's revenue to economic cycles. According to preliminary estimates, regional GRP contracted 4.1% in 2015, broadly in line with the national economic decline of 3.7%.
Weak Institutional Framework
The region's credit profile is constrained by the evolving nature of Russia's institutional framework for local and regional governments (LRGs). It has a short track record of stable development compared with many of its international peers. The unstable intergovernmental set-up reduces the predictability of LRGs' budgetary policies and hampers the region's forecasting ability.
The ratings also consider the following rating factors:
Fitch estimates that risk from the region's contingent liabilities is low. As of end-2015 it totalled RUB0.8bn, which was below 1% of the region's operating revenue. More than 90% of the contingent risk references the liabilities of JSC Svinokomplex Permskiy, a local pig-breeding company that is 100%-owned by the region. In 2015 its debt was mostly acquired by a new investor, who plans to take control of the company and start its financial recovery.
As with most Russian LRGs, regional budget policies are strongly dependent on the decisions of the federal authorities, which lead to continuing pressure on operating expenditure. Perm's tax policy focuses on economic development through a favourable tax regime for investment-intensive businesses.
As the region's ratings are at the same level as Russia's, negative changes to the sovereign ratings will be mirrored in the region's ratings. Additionally, prolonged deterioration of budgetary performance with an operating margin below 5% would lead to a downgrade.
An improvement of the operating margin towards 15%, accompanied by sound debt metrics with a direct risk-to-current balance below the weighted average debt maturity profile, could lead to an upgrade, provided the sovereign is also upgraded.
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Fitch has made a number of adjustments to the official accounts in order to make the LRG comparable internationally for analyses purposes. For Perm 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.
Additional information is available on www.fitchratings.com
International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016)
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