Fitch Affirms Russian Smolensk Region at 'B '; Outlook Stable
Smolensk's outstanding senior unsecured domestic bonds have also been affirmed at 'B+' and 'A-(rus)'.
KEY RATING DRIVERS
The ratings factor Smolensk's weak operating performance and high direct risk, with considerable refinancing needs concentrated in 2016. The Stable Outlook reflects Fitch's expectation that the region's budgetary performance will be supported by continuing federal government transfers and subsidised loans amid a negative economic environment.
Smolensk region's direct risk reached RUB25bn or 89% of current revenue in 2014 (2013: RUB20bn and 73%), which exceeded Fitch's expectation. Fitch forecasts the region's direct risk to grow towards 100% of current revenue by end-2017, driven by persistent weak fiscal performance and low self-financing capacity.
Fitch forecasts that the region's operating balance will stabilise at a weak level close to zero and the current balance will be negative during 2015-2017. Smolensk has recorded a negative operating balance since 2007 with the exception of 2013, when the region's operating balance reached a low 1% of operating revenue. In 2014, Smolensk's operating balance returned to negative territory due to lower than expected tax collection amid a weakening socio-economic environment.
Smolensk's immediate refinancing risk is moderate as only 9% of the region's direct risk matures in 2015. Considerable refinancing needs are concentrated in 2016 when the region has to repay 62% of its direct risk. In total, in 2015-2016 the region faces RUB6.7bn maturing bank loans, RUB1.2bn bond issues and RUB10bn budget loans.
The refinancing risk is partly mitigated by the region's high reliance on budget loans, which accounted for 54% of direct risk at end-2014. Fitch expects that the maturing budget loans are likely to be rolled over and the maturing bank loans and bonds will be refinanced on the capital market unless the federal government provides more grants. Fitch forecasts domestic interest rates in 2015 will increase to twice their 2014 level, which will make new debt more expensive and put additional pressure on the budget. Positively, as of 1 January 2015 Smolensk had RUB2bn unused credit lines that partly covers its current borrowing needs.
Fitch expects the region's deficit before debt variation to reach about RUB4bn or 13% of total revenue in 2015 (2014: 10%) and to reduce to about 8% in 2016-2017. In 2014 Smolensk postponed about RUB2bn of capex to 2015-2016, which will contribute to the region's spending in the medium term. This capex will be funded by RUB2.7bn earmarked cash accumulated at end-2014 and not by new debt.
The region's economic profile is weaker than the average Russian region. Gross regional product per capita was 84% of the national median in 2012. Fitch forecasts 4% contraction of national gross domestic product in 2015, and believes the region will also face a slowdown in economic activity, which will pressurise its budgetary performance.
The ratings could be upgraded if the region records an operating balance sufficient to cover interest expenses on a sustained basis, accompanied by stabilisation of direct risk.
A negative operating balance coupled with growing refinancing pressure due to an increasing proportion of short-term bank loans would lead to a downgrade.