Fitch Affirms Russia's Yaroslavl Region at 'BB'; Outlook Negative
The region's outstanding senior unsecured domestic bonds have been affirmed at Long-term local currency 'BB' and National Long-term 'AA-(rus)'.
The affirmation reflects Fitch's unchanged baseline scenario regarding Yaroslavl region's budgetary performance. The Negative Outlook reflects pressure on the region's current balance amid increased interest rates and a weakened operating balance.
KEY RATING DRIVERS
The ratings reflect the region's moderate direct risk and diversified economy, but also the weak institutional framework for Russian sub-nationals. The ratings also take into account the slowdown of the national economy, which place a strain on the region's budgetary performance.
Fitch expects the region's operating margin to increase to 4% in 2015 from 0.6% in 2014, supported by limited opex growth and increasing current transfers from the federal government. The region's tax proceeds are likely to see slow growth and be close to 2014's levels.
The agency forecasts the region's current balance will return to positive territory in 2015, but will remain close to zero over the medium-term. Increasing share of subsidised budget loans in the region's debt structure provides relief from high interest rates on domestic market debt. In 2014 the current balance further deteriorated to a negative 3.3% of current revenue from a negative 1.7% in 2013.
Cutbacks in capex and a strengthened operating balance will help the deficit shrink over the medium term. Fitch expects the budget deficit before debt will narrow to 6% of total revenue in 2015 after a high average 13% in 2013-2014, and further to 4%-5% in 2016-2017. The region aims to achieve a balanced budget in 2016, which Fitch considers as unlikely due to rigid operating spending and a sluggish national economy.
Fitch expects the region's direct risk to grow to 65% of current revenue over the medium term (2014: 56%). Positively, the region's debt structure is shifting towards a higher proportion of subsidised federal budget loans. In 2015 the region received RUB6.8bn of federal budget loans to replace part of its market debt. The budget loans bear 0.1% interest rates and have a three-year maturity. We forecast the proportion of budget loans in the region's debt portfolio to increase to 35% by the beginning of 2016, from 15% a year ago.
Yaroslavl's refinancing needs in 2015 are close to zero. However, during 2016-2017 the region faces refinancing pressure from 68% of total direct risk. The region plans to re-enter the domestic bond market in 2016 with new bond issues to refinance maturing obligations.
Yaroslavl possesses a diversified industrialised economy with wealth metrics that are in line with the national median. The economy mostly relies on various sectors of the processing industry, which provides a wide tax base. In 2014 the regional economy grew 1.3% yoy, outpacing weak national growth of 0.6%. The administration expects the local economy to shrink 3.2% in 2015, which is close to Fitch's forecast of a national GDP decline of 4%.
Inability to restore the current balance to positive territory or a sharp increase of direct risk to above 70% of current revenue, driven by short-term debt, could lead to a downgrade.