Fitch Affirms Russian City of Nizhniy Novgorod at 'BB-'; Outlook Stable
16 Dec 2016 12:12 PM
Fitch Ratings-Moscow-16 December 2016: Fitch Ratings has affirmed the Russian City of Nizhniy Novgorod's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB-'and Short-Term Foreign Currency IDR at 'B'. The agency has also affirmed the city's National Long-Term Rating at 'A+(rus)'. The Outlook on the Long-Term Ratings is Stable.
The affirmation reflects Fitch's unchanged base case scenario regarding Nizhniy Novgorod's weak operating balance, and increasing direct risk driven by an ongoing deficit before debt variation over the medium term.
KEY RATING DRIVERS
The ratings reflect the city's moderate direct risk, albeit with a concentrated repayment schedule, a low operating balance that is insufficient to cover interest payments and a weak institutional framework for Russian sub-nationals. The ratings also factor in a diversified local economy and potential support from Nizhniy Novgorod Region (BB/Negative/B).
Fitch expects the city's current balance to remain negative over the medium-term, weighed down by growing direct debt and high interest rates on the domestic capital market. At the same time Fitch is projecting a modest recovery of the operating margin to 2%-3% over 2016-2018, after a close to zero margin during 2014-2015. This is based on our expectation that the administration will keep operating expenditure growth below operating revenue growth.
Fitch expects the city will record a budget deficit at around 6% of total revenue, which is in line with 2015's levels. For 10M16 the administration collected 74% of its full-year budgeted revenue and incurred 78% of its expenditure budget. This led to an interim RUB1.6bn deficit, which is in line with our expectations of close to a RUB1.8bn full-year deficit.
Fitch expects direct risk will grow to RUB9.5bn at end-2016, from RUB8.2bn at end-2015. Nevertheless, direct debt remains moderate by international standards and should stay below 50% of current revenue until end-2018.
Historically, the City of Nizhniy Novgorod's debt had been dominated by one-year bank loans, which led to ongoing refinancing pressure. In 2016 the city has contracted several three-year bank loans totaling RUB5.9bn (73% of total debt stock as of 1 December 2016), extending its debt repayment profile till 2019 and mitigating refinancing pressure.
The city has no repayments until 2017 when it has to refinance RUB2bn of short-term bank loans and RUB0.1bn of subsidised budget loans, which represented 25% of total debt stock as of 1 December 2016. Another refinancing peak is in 2019, when the city is expected to repay RUB5.9bn of bank loans. Fitch expects the city to be able to refinance its maturing liabilities, due to its access to domestic financial markets.
The city has a population of 1.3 million and is the capital of Nizhniy Novgorod Region, one of the top 15 Russian regions by gross regional product, which provides an industrialised and diversified tax base. The city receives negligible general-purpose financial aid from the region as its fiscal capacity is stronger than the average municipality in the region. Fitch forecasts a 0.4% decline of national GDP in 2016, which in turn will weigh on the city's economic and budgetary performance.
The City of Nizhniy Novgorod's credit profile remains constrained by the weak institutional framework for local and regional governments (LRGs) in Russia. Russia's institutional framework for LRGs has a shorter record of stable development than many international peers. The predictability of Russian LRGs' budgetary policy is hampered by the frequent reallocation of revenue and expenditure responsibilities among government tiers.
A downgrade may result from a further increase of the city's direct risk, driven by short-term financing, to above 60% of current revenue, and weak budgetary performance with a continuing negative current balance.
An upgrade may result from direct debt stabilising at below 50% of current revenue, coupled with a lengthening of the debt maturity profile and improvement of budgetary performance with a positive current balance on a sustained basis.
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Fitch has made a number of adjustments to the official accounts to make the LRG comparable internationally for analytical purposes, including
- 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 for budget entities employees were segregated from current transfers to a respective expenditure item.
- Goods and services of capital nature were re-classified from operating expenditure to capital expenditure.
Additional information is available on www.fitchratings.com
International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016)
National Scale Ratings Criteria (pub. 30 Oct 2013)
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