Fitch Affirms Russian Bashkortostan Republic at 'BBB-'; Outlook Stable
02 Dec 2016 12:11 PM
Fitch Ratings-Moscow/London-02 December 2016: Fitch Ratings has affirmed Russian Bashkortostan Republic's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB-' and Short-Term Foreign Currency IDR at 'F3'. The agency has also affirmed the region's National Long-Term rating at 'AA+(rus)'. The Outlooks on the Long-Term ratings are Stable. The region's outstanding senior unsecured domestic bonds have also been affirmed at 'BBB-' and 'AA+(rus)'.
The affirmation reflects unchanged Fitch's base case scenario regarding the republic's sound fiscal performance and strong debt metrics over the medium term.
KEY RATING DRIVERS
The 'BBB-' rating reflects Bashkortostan's sound budgetary performance, supported by a well-diversified economy and close to zero net overall risk. The ratings also take into account the weak institutional framework for Russian sub-nationals and the republic's large public sector.
Fitch forecasts Bashkortostan will consolidate its operating balance at 10% (2015: 12.3%) of operating revenue in 2016-2018 that will be supported by steady tax proceeds from its strong tax base and on-going control of expenditure. For 9M16, the republic recorded an interim RUB15bn budgetary surplus resulting from outperforming collection of revenues and cost containment, including postponing capex payments to later in the year.
We expect higher spending over 4Q16 to result in a low full-year deficit before debt variation at 1%-2% of total revenue (2015: surplus 0.6%), which will be mostly funded by the region's sound cash balance. The republic's self-financing capacity remains strong and we project current balance and capital revenue will cover about 90% of capex (2015: 100%), leading to low prospects for raising debt in 2016-2018.
Fitch forecasts direct risk will remain low, at 20% (2015: 18%) of current revenue over the medium term. In 9M16, Bashkortostan's direct risk slightly increased in absolute terms to RUB25.5bn from RUB24.1bn at end-2015, as the region contracted a RUB3.3bn budget loan to repay RUB2bn of maturing bonds.
In its debt policy, Bashkortostan relies on long- and medium-term financing and has a diversified debt portfolio. Direct risk is 45% composed of budget loans, followed by bonds (42%) and bank loans (13%). About 80% of maturities are spread in 2016-2020 and the remaining 20% are budget loans due 2023-2034. The republic's weighted average maturity of debt at 4.8 years materially exceeds its debt payback (direct risk to current balance) of 1.4 years in 2015. This is rating positive and we project the trend to continue over the medium term.
The republic has a large number of public sector entities (PSEs) under its control. Fitch considers contingent risk stemming from the debt of Bashkortostan's PSEs as moderate. Additionally, the republic owns 25% in PJSOC Bashneft (BB+/Rating Watch Evolving) and benefits from dividend proceeds (2015: RUB5bn). Despite the recent acquisition of the latter by Rosneft (see Fitch 'Fitch Places Russia's Bashneft on Rating Watch Evolving on Acquisition by Rosneft' dated 10 October 2016), the region expects to continue receive support from the company over the medium term.
Russia's institutional framework for sub-nationals is a constraint on the republic's ratings. Frequent changes in both the allocation of revenue sources and the assignment of expenditure responsibilities between the tiers of government limit Bashkortostan's forecasting ability and hamper the region's strategic planning and debt and investment management.
Bashkortostan is one of Russia's largest industrial centres. Local industry generates about 40% of the region's gross regional product (GRP) and is dominated by production of petroleum products (33%), mining (17%) and chemical manufacturing (13%). The republic's government estimates GRP growth at 0.5% yoy in 2016 (2015: decline 1.4%) and 1%-2% annually in 2017-2018 supported by positive dynamics in prime industrial sectors and agriculture.
A sharp deterioration of budgetary performance leading to debt payback above 10 years or a sovereign downgrade would lead to negative rating action.
An upgrade of the sovereign could lead to an upgrade of the region's rating if its operating margin consistently improves above 15% while debt remains low.
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Fitch has made a number of adjustments to the official accounts in order to make the LRG comparable internationally for analysis purposes. For the republic of Bashkortostan these adjustments include:
- Transfers received of capital nature were re-classified from operating revenue to capital revenue.
- Transfers made of capital nature 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 at www.fitchratings.com.
International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016)
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