Fitch Affirms Kirov Region at 'BB-'; Outlook Stable


16 Dec 2016 12:06 PM


Fitch Ratings-Moscow/London-16 December 2016: Fitch Ratings has affirmed Russian Kirov Region's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB-', National Long-Term Rating at 'A+(rus)' and Short-Term Foreign Currency IDR at 'B'. The Outlooks on the Long-Term ratings are Stable.

The affirmation reflects unchanged Fitch's base case scenario regarding the region's stabilised operating performance and moderate direct risk growth over the medium term.

KEY RATING DRIVERS
The 'BB-' rating reflects Kirov's low operating balance, our expectation of a narrowing budget deficit and high direct risk with material proportion of low-cost budget loans. The ratings also consider the region's modest economic indicators and weak institutional framework for Russian sub-nationals.

Fitch projects Kirov's operating balance will remain at 2%-3% of operating revenue over the medium term (2015: 2.7%). However, this should be sufficient to cover reduced interest payments. We also forecast Kirov will narrow deficit before debt variation to 5%-7% of total revenue in 2016-2018 from an average 10% in 2013-2015 driven by requirements imposed by the Ministry of Finance as a condition for granting budget loans to the region.

Fitch considers that the region's fiscal flexibility remains low. Its tax raising ability is limited by the modest size of the tax base and low degree of autonomy in setting tax rates. More than 65% of Kirov's tax revenue is personal and corporate income taxes, which are slowing down amid a deteriorated economic environment in Russia. Most expenditure is social-oriented and hence quite rigid, while capital expenditure has already been cut towards 10% of total expenditure, leading to low expenditure flexibility.

In 10M16, the region's performance was in line with our expectation. Kirov has collected 79% of full-year budgeted revenue and incurred 77% of expenditure. This resulted in an intra-year deficit of RUB1.3bn and Fitch forecasts a full-year deficit of RUB3.1bn in 2016. Direct risk was RUB26bn at end-October 2016, moderately up from RUB23.6bn at end-2015.

Fitch projects Kirov's direct risk will reach 70% of current revenue by end-2018 (2015: 59%) due to an expected continuous budget deficit. Direct debt will likely remain moderate at below 40% of current revenue (2015: 18%) as we expect the region will continue to benefit from ongoing state support in the form of low-cost budget loans. We project the proportion of budget loans will remain high at about 55% of the direct risk in 2016-2018.

Like most Russian regions, Kirov's refinancing risk stems from its reliance on one- to three-year bank loans. At 1 December 2016, the region's debt repayment schedule was concentrated in 2017-2018, when more than 90% of direct risk is due, including RUB15bn bank loans and RUB8.6bn budget loans. Fitch expects the region will roll-over its maturing budget loans while remaining funding needs will be covered by bank loans. We consider Kirov will have reasonable access to capital markets over the medium term.

Kirov has a diversified but modest economy. Its gross regional product (GRP) per capita was 66% of the national median in 2014. The major taxpayers are spread across various sectors of the economy and the largest 10 of them contributed less than 20% of Kirov's tax revenue in 2014. Based on the region's estimates, GRP contracted 4% in 2015 (2014: grew 2.2%), in line with the national economic trend. The regional administration expects the local economy to stagnate or grow only 1% per year in 2016-2018.

Russia's institutional framework for sub-nationals is a constraint on the region's ratings. Frequent changes in the allocation of revenue sources and in the assignment of expenditure responsibilities between the tiers of government hamper the forecasting ability of local and regional governments in Russia.

RATING SENSITIVITIES
An improvement in the operating margin towards 10%, coupled with a debt payback ratio (direct risk to current balance) of around 10 years on a sustained basis, could lead to an upgrade.

The inability to maintain a positive operating margin on a sustained basis or an increase in direct risk above 80% of current revenue could lead to a downgrade.

Contact:
Primary Analyst
Elena Ozhegova
Associate Director
+7 495 956 2406
Fitch Ratings CIS Ltd
26 Valovaya Street
Moscow 115054

Secondary Analyst
Vladimir Redkin
Senior Director
+7 495 956 2405

Committee Chairperson
Guido Bach
Senior Director
+49 69 768076 111

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 Kirov 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.

Applicable Criteria
International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016)
National Scale Ratings Criteria (pub. 30 Oct 2013)

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


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