Fitch Affirms Russia's Mordovia Republic at 'B+'; Outlook Stable
The affirmation reflects Fitch's unchanged base line scenario regarding the republic's high direct risk and weak operating balance that will be insufficient to cover growing interest payments over the medium term.
KEY RATING DRIVERS
The 'B+' ratings reflect Mordovia's volatile operating performance and high direct risk, resulting from large capital expenditure, which is mitigated by significant exposure to long-term low-cost budget loans. The ratings also reflect our expectation that the republic will continue to receive support from the federal government ahead of hosting the world football championship FIFA 2018, while its own financial flexibility will remain weak.
Fitch projects that Mordovia's direct risk will remain high at 130%-140% (2015: 121%) of current revenue as the region will likely to continue to record a deficit before debt variation over the medium term. The republic has low expenditure flexibility, which is fuelled by preparations for FIFA 2018. We project the deficit to be above 10% of total revenue in 2016-2017 before narrowing to 4%-5% in 2018 due to completion of infrastructure projects.
During 7M16, Mordovia's direct risk grew to RUB38.3bn from RUB34.7bn at end-2015 and we believe it could reach RUB39.2bn by end-2016. In mitigation, 55% of the risk (RUB21bn) is long-term budget loans that the federal government has provided to the republic at a preferential 0.1% interest rate. Fitch expects that Mordovia will continue to receive support from the state over the medium term. The federal government has already approved RUB4.6bn budget loans for the republic in 2016.
The republic's refinancing risk is concentrated in 2018 when RUB12.7bn or 33% of direct risk matures. In 2016, the republic needs to repay RUB4.7bn (12% of direct risk). The risk is mitigated by already contracted budget loans. Additional funding will come from RUB5bn five-year bond issue that Mordovia plans to issue by end-2016.
Fitch forecasts Mordovia's operating performance to be weak over the medium term, with an operating balance at 4% of operating revenue (2015: 7%) and a negative current balance due to growing interest payments. We expect that the republic's tax capacity will remain modest due to the weak tax base and that federal transfers will constitute a significant proportion of Mordovia's budget, averaging about 40% of total revenue annually in 2016-2018.
In 2015, the republic's government estimated that the republic's economy had grown 2.8% while the national economy contracted 3.7%. The growth was supported by a developing agricultural sector and FIFA championship-related construction. Nevertheless, we expect that the region's wealth metrics will remain low, with GRP per capita being 70%-75% of the national median (2014: 73%).
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 in Russia. In particular, the republic's budgetary performance is reliant on support provided by the state.
A sustainable improvement in the operating balance towards 10% of operating revenue leading to a strengthening of the debt payback (direct risk to current balance) towards 20 years (2015: 58 years), could lead to an upgrade.
Continuous growth of direct risk above Fitch's projections (140% of current revenue), accompanied by an increase of the republic's refinancing pressure and a negative operating balance, would lead to a downgrade.