Fitch Affirms Russia's Mari El Republic at 'BB'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the Russian Mari El Republic's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB', with Stable Outlooks, and Short-term foreign currency IDR at 'B'.
The agency has also affirmed the republic's National Long-term rating at 'AA-(rus)' with Stable Outlook. Mari El's outstanding senior debt ratings have been affirmed at 'BB' and 'AA-(rus)'.
The affirmation reflects our largely unchanged base case scenario regarding the republic's stable fiscal performance and moderately increasing direct risk, which are commensurate with its ratings.
KEY RATING DRIVERS
The 'BB' ratings reflect the republic's moderate direct risk with increased exposure to refinancing risk, a modest economic profile amid a deteriorating macro-economic environment in Russia as well as satisfactory fiscal performance.
Fitch expects Mari El to record stable fiscal performance in 2016-2018, with an operating balance at about 8%-10% of operating revenue (2015: 11.2%). This will be driven by prudent management aimed at cost control and an expected steady increase in operating revenue of 5% per year over the medium term. Revenue will be driven by modest growth of tax revenue from processing industries, in line with expected economic growth and stable transfers from the federal government.
The republic recorded deficit before debt variation at 10% of total revenue at end-2015, in line with the previous year's figure. The deficit was driven by financing needs for capex, which represented 20% of total spending, in line with the republic's five-year average. We project the region will slightly narrow its deficit before debt to about 8% of total revenue by end-2018, driven by lower capex averaging 16% of total spending over the medium term.
Fitch projects continued growth of Mari El's direct risk to RUB20bn by end-2018, or about 80% of current revenue (2015: 60%). Direct risk in 2015 increased slightly above our last year's expectation to RUB13bn, from RUB10.7bn a year earlier. The increase is primarily driven by RUB2.5bn new low-cost budget loans from the federal government to fund the region's budget deficit and partly replace maturing bank loans and bonds. By refinancing with budget loans, the republic has been able to avoid increased costs of borrowing arising from interest rate volatility.
We do not expect Mari El's direct debt (bank loans and bonds) to exceed 60% of current revenue over the medium term. However, the region's recently intensified use of short-term bank loans, away from funding with medium-term loans (in 2012-2014), has significantly increased refinancing risk, with 67% of outstanding debt maturing in 2016. In Fitch's view continued reliance on primarily short-term bank loans will weaken debt metrics, potentially leading to negative rating action.
Russia's institutional framework for subnationals is a constraining factor on the republic's ratings. Frequent changes in both the allocation of revenue sources and the assignment of expenditure responsibilities between the tiers of government limit Mari El's forecasting ability and negatively affect the republic's strategic planning, and debt and investment management.
Mari El's socio-economic profile is historically weaker than the average Russian region. Its per capita gross regional product (GRP) was 30% lower than the national median in 2012-2015 but performed better than the national economy in 2015. Mari El's GRP increased 3.8% yoy in 2015, according to the region's preliminary estimates, in contrast to Russia's 3.7% decline in GDP. The republic projects 2.5%-3.5% economic growth over the medium term.
The ratings could be positively affected by improved budgetary performance leading to deficit before debt decreasing below 5% of total revenue, coupled with an extension of the debt maturity profile.
Conversely, a downgrade or revision of the Outlook to Negative could result from sustained deterioration of operating performance, with an operating margin below 5%, along with increased direct debt to above 60% of current revenue over the medium term.