Fitch Affirms Russian Krasnodar Region at 'BB'; Outlook Stable
09 Dec 2016 12:06 PM
Fitch Ratings-Moscow/London-09 December 2016: Fitch Ratings has affirmed Russian Krasnodar Region's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB' and National Long-Term rating at 'AA-(rus)' with Stable Outlooks. The Short-Term Foreign Currency IDR has been affirmed at 'B'. The region's outstanding senior unsecured domestic bonds have also been affirmed at 'BB' and 'AA-(rus)'.
The affirmation reflects unchanged Fitch's base case scenario regarding stabilisation of the region's net overall risk and sustainably positive current balance over the medium term.
KEY RATING DRIVERS
The 'BB' rating reflects Krasnodar's high direct risk, which is mitigated by a high proportion of long-term low cost budget loans, adequate fiscal performance and a well-diversified economy. The ratings also consider the region's material contingent risk stemming from its large public sector and the weak institutional framework for Russian sub-nationals.
Fitch projects Krasnodar's operating performance will improve to 8% of operating revenue in 2016-2018 (2015: 4%) driven by moderate growth of tax revenues amid the administration's measures aimed at slowing down operating expenditure. We estimate tax revenue will grow 9% in 2016 (2015: 0.7%) supported by the region's developing tax base and restored corporate income tax. We forecast operating balance will be sufficient to cover interest payments by 2.5x over the medium term (2013-2015: average 1x).
In 10M16, the region's revenue collection was in line with our expectation. Krasnodar has collected 83% of full-year budgeted revenue while a material amount of expenditure was postponed to November-December, resulting in an intra-year surplus of RUB8.4bn (2015: deficit before debt RUB12.2bn). Fitch projects the full-year deficit before debt variation will amount to 3% of total revenue in 2016-2018, which is significantly below the average 15% in 2013-2015, when Krasnodar incurred high capex related to infrastructure investments for the 2014 Winter Olympic Games.
Fitch projects net overall risk to remain high at 90% of current revenue over the medium term. At end-October 2016, direct risk amounted to RUB135bn, slightly up from RUB133.8bn at end-2015. About 40% of the risk was budget loans linked to the Olympics financing. They bear a 0.1% interest rate and mature in 2023-2034, which reduces annual debt service and eases refinancing pressure on the budget. Additionally Krasnodar is exposed to material contingent risk stemming from its PSEs' debt, which is estimated by Fitch at RUB25.4bn at end-2015, including RUB11.5bn guaranteed debt of the Olympics developer NPJSC Centre Omega.
Like most Russian regions, Krasnodar is exposed to refinancing risk as maturities of its bank loans and bonds totalling RUB70.9bn (52% of the risk) are concentrated between 2016 and 2019. Fitch expects Krasnodar will fund its refinancing needs by bank loans and bond issues as the region will continue to have fair access to capital market over the medium term.
Fitch views Russia's weak institutional framework for local and regional governments (LRGs) as a constraining factor on the region's ratings. It has a short track record of stable development compared with many of its international peers. Unstable intergovernmental set-up leads to lower predictability of LRGs' budgetary policies and negatively affects the region's forecasting ability, and debt and investment management.
Krasnodar region's economy is diversified, providing a broad tax base. Krasnodar is among the top five Russian regions by gross regional product (GRP) and population, and its GRP per capita is 13% above the national median (2014). Krasnodar's administration expects GRP will grow by 0.9% in 2016, 1.7% in 2017 and 3.5%-4.8% in 2018-2019 supported by developing processing industries and agricultural sector.
A strong operating balance of about 10% of operating revenue on a sustained basis accompanied by a reduction of net overall risk towards 60% of current revenue (2015: 90%) could lead to positive rating action.
Consistently weak operating balance insufficient to cover interest expense or inability to maintain the net overall risk to current revenue below 100% would lead to negative rating action.
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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 Krasnodar region 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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