Russian City Of Ufa Affirmed At 'BB-/ruAA-' On Modest Budgetary Performance, Neutral Liquidity; Outlook To Stable
April 30, 2013 Standard & Poor's
Standard & Poor's Ratings Services today affirmed its 'BB-' long-term issuer credit rating and its 'ruAA-' Russia national scale rating on the Russian City of Ufa, located in the Republic of Bashkortostan. We revised the outlook to stable from positive.
The affirmation reflects our view that Ufa is likely to maintain its moderate budgetary performance and neutral liquidity position over the medium term.
The ratings on Ufa reflect our view of Ufa's limited budgetary flexibility and predictability, owing to Russia's developing and unbalanced institutional framework and its high dependence on federal and regional authorities' decisions; lower-than-average wealth levels in an international context; and high capital-expenditure requirements. The ratings are supported by our view of Ufa's modest debt burden, our expectation that its maturity profile will become smoother, and its relatively low contingent liabilities.
The city's budget is significantly exposed to the decisions of the federal and regional governments regarding tax shares and allocation of transfers and spending responsibilities. In 2012, a portion of the city's spending obligations was transferred to the Republic of Bashkortostan, and in turn the share of personal income tax that the city receives was decreased. At the same time, the amount of ongoing and capital transfers from Bashkortostan increased and we expect that in 2013-2015 transfers will make up more than 50% of the city's total revenues. We therefore believe that the flexibility and predictability of Ufa's financials have decreased.
Ufa's wealth level exceeds the average for Bashkortostan, but remains lower than that of Russian peers. The city's economy is still dependent on the oil refining and chemical industries, and we expect it to grow only modestly in the next three years. Infrastructure development needs are material and are likely to pressure Ufa's budget over the medium term.
In our base-case scenario for 2013-2015, we expect budgetary performance to remain moderate and operating margins to remain at breakeven, given the city's need to address increasing utility costs and raise salaries. We estimate that in 2013 Ufa will allocate about 5% of additional operating spending to increase public sector salaries, but will constrain spending growth in 2014-2015.
Our base-case scenario also assumes that capital grants from Bashkortostan, earmarked for investment in Ufa's road, transport, and utilities infrastructure and housing construction will alleviate the pressure on the city's budget in the medium term. This cofinancing should allow Ufa to maintain its capital-expenditure program at a high 30% of total expenditures in 2013-2015, while its deficits after capital accounts will likely stay below 5% of total revenues.
Consequently, Ufa's total tax-supported debt will remain modest compared with that of international peers and won't exceed about 55% of consolidated operating revenues in the next three years. We forecast in our base-case scenario that Ufa will gradually accumulate direct debt, which might reach 25% of operating revenues, and that it will maintain the level of outstanding guarantees that it issues to support infrastructure investment projects at about 30% of operating revenues.
The stable outlook reflects our view that although Ufa's operating balance will likely remain at breakeven in 2013-2015, expected capital transfers from higher-tier budgets will allow the city to finance its capital program, while its deficits after capital accounts and borrowing needs will remain modest. The outlook also assumes that the city's liquidity position will remain neutral.
We could lower the ratings within the next 12 months if, in line with our downside scenario, Ufa's liquidity position deteriorates because of short-term debt accumulation, the need to service guaranteed debt, or if the amount of available credit facilities falls below the city's annual debt service.
We could raise the ratings within the next 12 months if, in line with our upside scenario, additional budget revenues translate into a positive balance after capital accounts and cash accumulation, and together with a more gradual debt repayment schedule, lead to a structural improvement of Ufa's liquidity position.
Company — Ufa
Full nameUfa (Bashkortostan republic)