Fitch Affirms Russia's Kemerovo Region at 'BB-'; Outlook Stable
The ratings reflect the region's modest, though improving, fiscal performance, which is in line with Fitch's expectation of both a narrowing budget deficit and consolidation of the region's debt metrics over the medium-term. This is counterbalanced by persistent refinancing pressure and the concentrated profile of the local economy.
Fitch projects Kemerovo's budgetary performance will moderately recover in 2017 after a period of weak operating balances and growing direct risk. This will be underpinned by a sharp increase of corporate income tax (CIT) as a result of an upswing in the coal mining industry, which has a large presence in the region. The region's operating balance will likely represent 6%-8% of operating revenue over the medium-term (2016: 5%). However, a reversal of the coal market could negatively affect the region's tax base and undermine operating performance over the medium-term.
During 8M17 the region collected 76% of its full-year budgeted revenue and incurred 63% of its full-year budgeted expenditure, which resulted in a sound interim budget surplus of RUB15 billion. Fitch expects that seasonal acceleration in spending in 4Q17, including those of capital nature, would turn the interim result into a small full-year deficit of 1%-2% (2015-2016: average 5.2%).
Fitch expects direct risk will remain below 65% of current revenue over the medium-term (2016: 64%). During 9M17 the region's direct risk decreased to RUB56.2 billion from almost RUB63 billion while its structure and maturity profile improved. In September 2017, Kemerovo issued a RUB9 billion amortising domestic bond due in 2024 to refinance costly bank loans and extend its debt maturity profile. Low-cost budget loans as a share of direct risk remained material at 32% as of 1 October 2017, which will allow Kemerovo to save on interest expenses.
The region remains exposed to refinancing pressure over the medium-term. In 2018-2019 it will have to refinance around 50% of its total debt stock. In Fitch's view this will not present a problem to the administration due to its strong relationships with the banks and access to the domestic bond market. Immediate refinancing needs until end-2017 are low as the region has to redeem only RUB0.25 billion in debt.
The region's liquidity position improved significantly to RUB10.5 billion in September from just RUB0.7 billion at the beginning of the year. This was supported by strong tax collection during the year. Monthly average cash holdings improved to RUB6 billion in 8M17 from RUB1.4 billion in 2016.
The region's economy is characterised by a developed industrial base dominated by the coal and metal industries, which can result in volatile tax revenue. According to the administration's estimates, the regional economy grew 1.4% in 2016, while the national economy contracted 0.2%. Fitch forecasts the Russian economy to grow 2% in 2017, and we believe the region's economy will also follow this trend.
The region's credit profile remains constrained by the weak institutional framework for Russian local and regional governments (LRGs). It has a short track record of stable development compared with many of its international peers. The frequent reallocation of revenue and expenditure responsibilities within tiers of government reduces the predictability of LRGs' budgetary policies and hampers Kemerovo's forecasting ability.