Russian City of Nizhny Novgorod Affirmed At 'BB' And 'ruAA' On Sound Budgetary Performance And Low Debt; Outlook Stable
November 23, 2012 Standard & Poor's
• We expect the Russian city of Nizhny Novgorod to maintain its sound budgetary performance despite the need to increase operating spending in the next three years.
• We also expect the city's management to continue its prudent practice of organizing credit facilities, which will result in neutral liquidity.
• We are therefore affirming our 'BB' and 'ruAA' ratings on the city.
• The stable outlook reflects our view that Nizhny Novgorod's cautious spending policies, and capital support from the oblast and federal budget, will result in a sound budgetary performance with an average operating balance of about 5% of operating revenues and a deficit after capital accounts of 3% of total revenues in 2012-2015.
Standard & Poor's Ratings Services today said it affirmed its long-term issuer credit rating on the Russian city of Nizhny Novgorod at 'BB' and its Russia national scale rating at 'ruAA'. The outlook is stable.
The affirmation reflects our view of the city's concentrated economic base, limited budgetary flexibility and predictability, and significant infrastructure investment needs. Nevertheless, we believe the city's sound budgetary performance, low debt levels, and neutral liquidity supported by prudent financial management practices underpin its ratings.
Nizhny Novgorod is Russia's fifth-largest city, with gross output and revenues per capita higher than Russian average and those of the Nizhny Novgorod oblast. We expect its economy to expand by about 5% a year on the back of a growing service sector over the next three years.However, the city's economy and employment still largely depend on machinery production and auto manufacturing group GAZ (not rated).
Nizhny Novgorod's budgetary flexibility and predictability are limited by federal and Nizhny Novgorod oblast control over transfers and tax-sharing rates. We estimate that the city lost about 17% of its operating revenues in 2012 because of a drop in its share of personal income and corporate property taxes triggered by amendments to federal legislation. In our view this loss will not be fully covered by a reduction in healthcare spending. Federal initiatives to increase public sector salaries will also pressure the city's budget from 2012-2015.
The city's management is committed to fiscal discipline, and we expect it to control operating expenditure growth--mainly maintenance and other discretionary spending--over the next three years in line with its conservative draft financial plan. As a result, under our base-case scenario we expect sound operating performance with operating margins of about 5% in 2012-2015.
We also believe the city will continue to benefit from co-financing and direct investment into its infrastructure from higher-tier budgets, which should support its balance after capital accounts. We expect Nizhny Novgorod oblast to continue to provide capital grants for major transport projects, including road and metro construction. In two to four years the city is also likely to receive federal funds in preparation for its hosting of the 2018 FIFA World Cup, which will include the reconstruction of its airport. The influx of capital transfers should allow the city to cover part of its pressing infrastructure development needs and keep its average deficit after capital accounts below 5% of total revenues.
We therefore believe Nizhny Novgorod's tax-supported debt will remain low at an average 25% of consolidated operating revenues to 2015.
The stable outlook reflects our view that Nizhny Novgorod's cautious spending policies, and capital support from the oblast and the federal budget, will result in a sound budgetary performance with an average operating balance of about 5% of operating revenues and a deficit after capital accounts of 3% of total revenues in 2012-2015. It also assumes that the city will continue its existing liquidity policy and maintain neutral liquidity over the next three years.
We might take a negative rating action within the next 12 months if Nizhny Novgorod's management proved unable to limit spending growth. This could lead to weakening budgetary performance with operating balance turning negative in 2012-2013, and higher borrowing resulting in tax-supported debt of more than 30% of consolidated operating revenues, in line with our downside scenario.
We might take a positive rating action if, in line with our upside-case scenario, a continued shift to medium-term maturities resulted in an improvement in the city's debt profile that, together with higher operating margins supported its liquidity. However, we view a positive rating action as unlikely over the next 12 months.
Company — Nizhny Novgorod finance department
Full nameNizhny Novgorod finance department