Fitch Affirms Russia's Republic of Khakassia at 'BB'; Outlook Negative
The republic's outstanding senior unsecured domestic bonds have been affirmed at 'BB' and 'AA-(rus)'.
The affirmation reflects Fitch's unchanged baseline scenario regarding Khakassia's weak budgetary performance and rising debt. The Negative Outlook reflects the republic's continuously large budget deficit and its inability to restore its current balance to surplus over the medium-term.
KEY RATING DRIVERS
The ratings reflect a weak institutional framework for Russian subnationals, Khakassia's low operating balance and growing direct risk accompanied by high refinancing pressure. The ratings also take into account the slowdown of the national economy, which could place a strain on the republic's tax base.
Fitch expects the republic's current balance to remain negative in 2015-2017 (2014: -4.8%) as a slightly improving operating balance will not be sufficient to cover increased interest payments. We expect Khakassia's operating margin to be a low 2%-4% over the medium term (2014: negative 0.6%), supported by increased revenues from the power generation sector and higher profits of export-oriented taxpayers buoyed by a weaker rouble.
Fitch forecasts deficit before debt variation to average a substantial 12% of total revenue in 2015-2017 (2014: 13%) as the region's capacity to scale back its capex is low. We project that more than 60% of capex (2014: 68%) are rigid during 2015-2017 as they will be funded by earmarked transfers from the federal budget. Low manoeuver on capex, coupled with rigid operating expenditure, result in Khakassia's limited budget flexibility. The on-going deficit will lead to continued direct risk growth. We expect Khakassia's direct risk to approach 90% of current revenue by end-2017, up from 61% in 2014.
In Fitch's view the republic is exposed to significant refinancing pressure. In 2015-2016, Khakassia faces RUB7.6bn maturing debt (54% of direct risk as of 1 September 2015). Fitch expects most maturities to be financed by market debt (bank loans and bonds). In Fitch's view, the republic has adequate access to market funding that mitigates refinancing risks and insufficient coverage of interest payments by the operating balance. However, increased reliance on market debt exposes the republic to volatile interest rates and may put further stress on its current balance.
During 8M15 Khakassia's direct risk profile shifted towards market debt due to reduced support from the federal budget, a move which Fitch views as credit-negative. As of 1 September 2015 subsidised budget loans were RUB1.6bn, down from RUB3bn or 11% of the region's direct risk (end-2014: 28%).
Khakassia's economy is concentrated in the hydro-power generation, mining and non-ferrous metallurgy sectors. The 10 largest taxpayers contributed 44.5% to the republic's tax revenue in 2014 (2013: 43.6%). Taxes provided 71% of operating revenue in 2014, which makes the region's budget prone to volatility. Fitch forecasts Russia's national economy to contract 4% in 2015, which could negatively affect Khakassia's tax base.
Inability to restore a positive current balance and to narrow the budget deficit to below 10% of total revenue could lead to a downgrade.