Fitch Affirms Russian City of Kazan at 'BB-'; Outlook Stable
09 Dec 2016 12:07 PM
Fitch Ratings-Moscow/London-09 December 2016: Fitch Ratings has affirmed the Russian City of Kazan's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB-', with Stable Outlooks, and Short-Term Foreign Currency IDR at 'B'. The agency has also affirmed the city's National Long-Term Rating at 'A+(rus)' with Stable Outlook. The city's outstanding senior unsecured domestic bonds have been affirmed at 'BB-' and 'A+(rus)'.
The affirmation reflects Fitch's unchanged base case scenario regarding Kazan's high but stable direct risk, modest operating performance and a small deficit before debt variation over the medium term.
KEY RATING DRIVERS
The 'BB-' rating reflects the city's low operating balance, high level of direct risk, although this is mitigated by its long-term repayment schedule, and weak institutional framework for Russian sub-nationals. The rating also considers Kazan's diversified economy and potential support from the Republic of Tatarstan (BBB-/Stable).
Fitch forecasts the city's operating balance will consolidate at about 3% of operating revenue (2015: 2.4%) in 2016-2018 supported by the administration's cost control measures, while the city's tax flexibility will remain weak. We expect a moderate improvement of the current balance to close to zero after negative 0.6% in 2015 due to declining interest payments following the reduction of interest rates on budget loans to 0.1% from 0.5% from 2016 onwards.
In 10M16, the city recorded an intra-year RUB1.4bn surplus, which resulted from the collection of 78% of budgeted full-year revenue upon incurring 68% of expenditure. We expect expenditure to surge in November - December and project a deficit before debt variation at 1.5% of total revenue in 2016, close to its 0.6% average in 2014-2015.
We expect the city will record a close to balance budget over the medium term as Kazan is restricted from making new market borrowings (bank loans and bonds) other than for refinancing needs. We therefore project the direct debt to stabilise at RUB4.8bn in 2016-2018, equal to 20%-25% of current revenue and expect that the deficit, if any, will likely to be funded by the city's cash balance (2015: RUB1.1bn).
Under Fitch's base case scenario, direct risk will amount to RUB30bn in 2016-2018 and relative to current revenue it will decline towards 135% in 2018 from 154% in 2015. Around 85% of direct risk relates to RUB25.1bn low-cost budget loans from Tatarstan, which were allocated to infrastructure development in preparation for Universiade 2013. The high debt is mitigated by the city's long-term maturity profile with a grace period until 2023 and principal amortisation in 10 annual instalments to 2032. In 10M16, the city had repaid RUB302m of the budget loan ahead of schedule.
Kazan is the capital of Tatarstan, one of the most developed Russian regions. The city's economy is diversified and has a developed industrial sector. The latter is dominated by petrochemicals, machine-building and food processing. The administration estimates the city's economy will remain stagnant in 2016 and will return to marginal 1%-2% annual growth in 2017-2018.
The city's credit profile remains constrained by the weak institutional framework for Russian LRGs, which has a shorter record of stable development than many of its international peers. The predictability of Russian LRGs' budgetary policy is hampered by frequent reallocation of revenue and expenditure responsibilities within tiers of government.
A gradual decline of direct risk relative to current revenue, accompanied by an improving operating balance to around 7% of operating revenue, could lead to an upgrade.
An increase in direct debt to above 50% of current revenue or a weakening of the operating balance towards zero could lead to a downgrade
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Fitch has made a number of adjustments to the official accounts to make the LRG comparable internationally for analytical purposes. For the city of Kazan these adjustments include:
- Transfers of capital nature received were re-classified from operating revenue to capital revenue.
- Transfers of capital nature disbursed were re-classified from operating expenditure to capital expenditure.
- Staff expenses were segregated from current transfers to a separate line.
- 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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