OREANDA-NEWS. Fitch Ratings has affirmed the Russian City of St. Petersburg's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB-', Short-Term Foreign Currency IDR at 'F3' and National Long-Term rating at 'AAA(rus)'. The Outlooks are Negative on the Long-Term IDRs and Stable on the National Long-Term rating.

The city's outstanding senior unsecured domestic bonds have also been affirmed at 'BBB-' and 'AAA(rus)'.

The affirmation reflects Fitch's unchanged base case scenario regarding St. Petersburg's sound budgetary performance and low direct risk over the medium term. The city's ratings are constrained by the ratings of Russia (BBB-/Negative).

KEY RATING DRIVERS
The ratings reflect St. Petersburg's sound credit profile, based on a positive net cash position, low debt, and strong liquidity resulting in sound financial flexibility. They also factor in a recessionary environment in Russia, which places, albeit modest, pressure on the city's well-diversified economy. The Negative Outlook reflects that on Russia's ratings.

Fitch projects St. Petersburg to maintain an operating surplus at about 13%-14% of operating revenue over the medium term (2015: 14%), supported by the city's sound tax base, which we expect to grow 3%-6% yoy (2015: 2%). Tax revenue growth decelerated in 2015 due to the city's economy shrinking 1% yoy on the back of Russia's depressed macro-economic trend (GDP contracted 3.7% yoy in 2015). The city's administration expects modest economic growth of about 1%-2% per year in 2016-2018.

St. Petersburg's budget is supported by stable tax revenue, which we expect to contribute up to 87% to the city's operating revenue over the medium term (2011-2015: average 85%). The prime sources of the city's tax revenue are corporate and personal income taxes, representing 79% of taxes collected in 2015.

Fitch projects a small deficit before debt variation at about 1%-2% of total revenue per year in 2016-2018, after a surplus of 1.7% in 2015 (2014: deficit of 3.4%). The city's capital outlays were reduced to 16.5% of total spending in 2015, from 22.4% a year earlier, resulting in the budget surplus. We expect St. Petersburg to maintain a sound self-financing capacity (SFC) with regard to capex, with the current balance and capital revenue comfortably covering most capital outlays. The city's SFC in 2015 exceeded actual capex.

Fitch expects the city's direct risk, according to international standards, to remain low in 2016-2018, below 5%-7% of current revenue (2015: 3.5%). St. Petersburg's debt stock currently comprises domestic bonds and federal budget loans. The city's exposure to refinancing risk is low, with 2016-2017 maturities fully covered by accumulated cash reserves (2015: RUB38bn). The city's contingent liabilities increased modestly to RUB22.3bn at end-2015 from RUB17.8bn at end-2014. Fitch does not expect a significant increase in the city's indirect risk over the medium term.

RATING SENSITIVITIES
The city's ratings are capped by Russia's ratings. A downgrade is unlikely due to the intrinsic strength of the city, unless the sovereign is downgraded. However, a sustained deterioration from our base case scenario of sound margins and low debt over the medium term would be negative for the ratings.