Fitch Affirms Russian Republic of Tatarstan at 'BBB-'; Outlook Stable


02 Dec 2016 12:10 PM


Fitch Ratings-Moscow-02 December 2016: Fitch Ratings has affirmed the Russian Republic of Tatarstan's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB-', Short-Term Foreign Currency IDR at 'F3' and National Long-Term rating at 'AAA(rus)'. The ratings are on Stable Outlook.

The affirmation reflects Fitch's unchanged base case scenario of Tatarstan's strong budgetary performance and moderate debt.

KEY RATING DRIVERS
Tatarstan's ratings are constrained by those of the Russian sovereign (BBB-/Stable). The republic's strong intrinsic credit profile reflects Tatarstan's well-diversified economy, strong operating margin, high capex flexibility and prudent debt management leading to moderate and low-cost direct risk with a long maturity profile. The ratings also factor in the deterioration of the national economy, which could put pressure on Tatarstan's budgetary performance.

Fitch expects Tatarstan to maintain sound fiscal performance with an operating balance of 25%-30% of operating revenue in 2016-2018 (2015: 32%). The modest deterioration in operating performance reflects continuing pressure on operating expenditure, and slower revenue growth due to a deteriorating economic environment. Operating expenditure grew 12% annually between 2013 and 2015, driven by higher indexed social transfers as inflation accelerated and by the federal government's decision to increase public sector salaries.

Fitch expects Tatarstan to continue to demonstrate a prudent budgetary policy and to keep deficit before debt variation under control in 2016-2018. Deficit before debt narrowed to 3.5% of total revenue in 2015 from a peak of 9% in 2014. Fitch forecasts the deficit will be between 1% and 3% in 2016-2018. Tatarstan has reasonable access to the domestic capital market, but relies solely on low-cost loans from the federal budget to finance its fiscal deficit.

For 10M16 the republic collected close to 80% of full-year budgeted revenue and incurred 70% of budgeted expenditure, leading to an interim RUB10bn surplus. However, such a surplus largely reflects delayed expenditure, and we expect higher spending over 4Q to result in a RUB6bn full-year deficit (2015: RUB7bn deficit), equivalent to 3% of estimated 2016 revenue.

Fitch projects the republic's direct risk will be RUB84.9bn, or about 44% of estimated 2016 current revenue (2015: 41.7%). It consists solely of federal budget loans, the bulk of which (RUB67bn) are for an investment programme for Universiade (the student Olympic games held in July 2013 in the City of Kazan (BB-/Stable), the republic's capital). They carry negligible 0.1% interest rates and mature in 2023-2032, easing refinancing pressure on the budget. A continuing strong current balance underpins the republic's sound debt payback (direct risk-to-current balance) at below 2x.

The republic has an extensive public sector, which includes unitary public companies and shareholdings in commercial companies mainly owned by Tatarstan via investment holding company JSC Svyazinvestneftekhim (SINEK; BB+/Stable/B). These companies have stable financial performance, but add contingent risk to the budget, including forex exposure. As of 1 January 2016, Tatarstan had RUB10bn of outstanding guarantee on a JPY16.5bn loan to OJSC Kamaz - a local heavy truck-producing company. The loan matures in 2034 and the company is servicing this obligation without Tatarstan's assistance.

Tatarstan's economy has a strong industrial sector that provides a diversified tax base such that the republic's budget is mostly funded through own resources. Tatarstan is among the top Russian regions by gross regional product (GRP), with a GRP per capita at 1.5x of the national median (2014). In line with the downward national economic trend, Tatarstan faced economic stagnation in 2015 and Fitch projects close to zero or mild GRP growth for 2016.

The republic's strong intrinsic credit profile remains constrained by a weak institutional framework for local and regional governments (LRGs) in Russia. Russia's institutional framework for LRGs has a shorter record of stable development than many international peers. Frequent reallocation of revenue and expenditure responsibilities between the tiers of government hampers the forecasting ability of Russian LRGs.

RATING SENSITIVITIES
As Tatarstan's ratings are constrained by the sovereign ratings, rating action on the Russian Federation's IDRs would lead to a corresponding rating action on Tatarstan.

A downgrade is unlikely due to the republic's intrinsic strength, unless the sovereign is downgraded. However, sustained material deterioration of the republic's budgetary performance and debt metrics would be negative for the ratings.

Contact:

Primary Analyst
Vladimir Redkin
Senior Director
+7 495 956 2405
Fitch Ratings CIS Ltd
26 Valovaya Street
Moscow, 115054

Secondary Analyst
Elena Ozhegova
Associate Director
+7 495 956 2406

Committee Chairperson
Guilhem Costes
Senior Director
+34 93 323 8410

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.

Fitch has made a number of adjustments to the official accounts in order to make the LRG comparable internationally for analyses purposes. For the Republic of Tatarstan 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

Applicable Criteria
International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016)

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy


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