Fitch Affirms Russia's Volgograd Region at 'B+'; Outlook Stable


16 Dec 2016 12:09 PM


Fitch Ratings-Moscow-16 December 2016: Fitch Ratings has affirmed Volgograd Region's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'B+', Short-Term Foreign Currency IDR at 'B' and National Long-Term Rating at 'A(rus)'. The Outlooks on the Long-Term Ratings are Stable. The region's outstanding senior unsecured domestic bond issues have been affirmed at 'B+' and 'A(rus)'.

The affirmation reflects Fitch's unchanged base case scenario regarding the region's current weak budgetary performance and stabilising debt over the medium term.

KEY RATING DRIVERS
The 'B+' rating reflects the region's historically weak - albeit expected to improve over the medium term - budgetary performance and high direct risk due to a persistent deficit in the past. The ratings also consider the region's economic stagnation amid a sluggish national economy and a weak institutional framework for Russian sub-nationals. Positively, Volgograd has an industrialised economy with a strong tax base.

Fitch projects a moderate improvement of operating performance over the medium term, with the current balance improving to 3% of current revenue, reversing the negative trend of the last five years. We also expect deficit before debt variation to narrow to 3%-5% of total revenue over the medium term from an average 12% in 2011-2015, driven by the requirements imposed by the Ministry of Finance as a condition for granting budget loans to the region.

The region's administration is implementing extensive cost-cutting measures in operating and capital expenditure. Volgograd is reviewing the list of social aid recipients, freezing wages and optimising the network of budgetary institutions. The region plans to have a balanced budget in 2017-2019, although we conservatively project a continuing, albeit gradually narrowing, deficit. We see limited scope to sharply reverse the five-year weak performance, given stagnating tax revenues and the rigidity of most budget expenditure.

Fitch forecasts direct risk will stabilise at below 70% of current revenue, due to the expected narrowing of the budget deficit. For 10M16, direct risk moderately increased to RUB49bn from RUB47bn at end-2015 as the region contracted RUB7.7bn budget loans to refinance maturing bonds and bank loans. As a result, the proportion of low-cost funding exceeded 55% of direct risk at 1 November 2016, up from 36% at end-2015.

Refinancing risk is lower than the region's 'B' category peers. In its debt policy, Volgograd relies on bonds, which comprise 26% of its debt stock, and three-year banks loans (19%). About 80% of maturities are spread between 2017 and 2019; by end-2016 Volgograd will need to repay RUB4.7bn, or 10% of its direct risk. The administration plans to fund 2016 refinancing needs with bank loans and budget loans, and plans to issue new bonds in 2017.

Volgograd has an industrialised economy with a concentrated tax base. The top 10 taxpayers are subsidiaries of large national companies operating in the oil & gas, power generation, transportation and financial sectors. They contributed about 40% of total tax revenue in 2015, which makes the region's revenue vulnerable to economic cycles. The region's administration estimates that GRP is stagnating in 2016 and expects a 1%-3% annual growth in 2017-2019, supported by development of local industries.

Russia's institutional framework for sub-nationals is a constraining factor 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 hampers the forecasting ability of local and regional governments (LRGs) in Russia.

RATING SENSITIVITIES
Stabilisation of direct risk at below 70% of current balance and sustainable improvement of the operating balance that is sufficient to cover interest payments could lead to an upgrade.

Inability to curb continuous growth of total indebtedness, accompanied by an increase in refinancing pressure and a negative operating balance, would 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 76 80 76 111

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 analysis purposes. For Volgograd region 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)
National Scale Ratings Criteria (pub. 30 Oct 2013)

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


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