Fitch Affirms Russia's Tula Region at 'BB'; Outlook Stable
The region's outstanding senior unsecured domestic bonds have been affirmed at 'BB' and 'AA-(rus)'.
The affirmation reflects Fitch's unchanged base line scenario regarding the region's budgetary performance and our expectation that the region will maintain a positive current balance and moderate direct risk in the medium term, as commensurate with the ratings.
KEY RATING DRIVERS
The 'BB' ratings reflect the region's average-sized economy, a weak institutional framework for Russian LRGs and deterioration of the national economic environment, which may put pressure on Tula's budgetary performance over the medium term. They also reflect the region's moderate direct risk with limited exposure to immediate refinancing risk and satisfactory fiscal performance with a sufficient operating balance to cover interest payments.
Fitch expects the operating balance to be close to the region's historical average at about 6%-7% of operating revenue in 2016-2018, and the current margin to remain positive at 4%-5%. Tula's budgetary performance recovered moderately during 1H16, with a surplus before debt variation on the back of expenditure restraint, while revenue proceeds grew as budgeted. However, as expenditure is likely to accelerate during 2H16, we are maintaining our projection of a RUB2.8bn budget deficit for the full year. Fitch assumes the region will continue to record a deficit before debt at about 3%-5% of total revenue in 2016-2018 (2015: 0.9% deficit).
Fitch expects Tula's direct risk will continue to increase but remain moderate at below 35% of current revenue in 2016-2018 (2015: 27%). As of 1 August 2016 the region's direct risk was composed of federal budget loans and domestic bonds and amounted to RUB15.7bn, little changed since the beginning of 2015. Subsidised budget loans constitute 59% of total direct risk, and their low annual interest rates allow the region to save on interest payments.
Despite the moderate debt burden, Tula is exposed to refinancing pressure in the medium term as it has to repay all outstanding debt over the next three years. Immediate refinancing risk is moderate as the region's RUB0.5bn bonds and RUB0.7bn budget loans due in 2016 are fully covered by RUB2.4bn outstanding cash and standby short-term credit facilities from the Russian Treasury.
The regional economy has a well-diversified processing industry and economic growth has outpaced the national average for four years in a row. According to preliminary data, in 2015 the regional economy grew 4.7%, in contrast to the national GRP decline of 3.7% and the administration expects growth to continue in 2016. Nevertheless, the region's economy remains moderate in the national context, with GRP per capita at 93% of the national median in 2014. Fitch forecasts a 0.5% decline of national GDP in 2016, which in turn could weigh on the region's economic and budgetary performance.
The region's credit profile remains constrained by the weak institutional framework for Russian LRGs, which has a shorter record of stable development than many of its international peers. The predictability of Russian LRGs' budgetary policy is hampered by frequent reallocation of revenue and expenditure responsibilities within tiers of government.
A sound budgetary performance with an operating margin above 10% on a sustained basis, accompanied by moderate direct risk below 40% of current revenue, would lead to an upgrade.
Conversely, deteriorated budgetary performance with an operating margin consistently below 5%, accompanied by weak debt payback exceeding 10 years (2015: 3.1years), could lead to a downgrade.