Fitch Affirms Russia's Astrakhan Region at 'B+'; Outlook Stable
June 9, 2014 Fitch Ratings
Fitch Ratings has affirmed Russian Astrakhan Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'B+', National Long-Term rating at 'A(rus)' and Short-term foreign currency IDR at 'B'. The Outlooks on the Long-term ratings are Stable.
KEY RATING DRIVERS
The ratings reflect high debt levels dominated by short-term bank loans, resulting in significant refinancing pressure, and a high concentration of the region's tax base. However, the ratings also factor in the region's exceptionally strong economic growth and sound budgetary performance since 2011.
Fitch forecasts that federal election pledges will continue to fuel expenditure growth leading to higher borrowings in the medium term. The agency expects the region's direct risk to exceed 70% of current revenue in 2014-2016 (2013: 64%). Debt coverage (direct risk/current balance) will remain weak (2013: 16 years), significantly above the maturity profile of less than two years, and this is reflected in the ratings of the region.
Fitch considers the region's refinancing needs as significant given the dominance of short-term bank loans in its funding. However, sound liquidity of RUB2bn as of 1 May 2014 and unutilised bank credit lines partially mitigate the refinancing risk.
The region has low exposure to contingent risk. Guarantees issued by the region and the debt of public sector enterprises totaled RUB0.2bn at end-2013, or 0.7% of the region's current revenue. The region has not issued new guarantees since 2010.
Regional GDP increased 23.7% in real terms in 2013 (2012: 9.7%), due to the development of vast offshore Caspian Sea oil resources of about 300 million metric tons (mmt). Extraction of oil increased 35% to 6.6 mmt in 2013. Fitch forecasts continued economic growth for the region at about 7% annually in real terms for 2014-2016.
Average salary in the region reached the national median in 2013. However, the region's per capita GDP was 85% of the national median. Fiscal concentration is high as the top 10 taxpayers accounted for about 50% of Astrakhan region's total tax revenues.
Fitch expects a stable operating surplus at about 10% of operating revenue per year for 2014-2016, supported by a growing economy. Its operating surplus - at 9% of operating revenue in 2013 - is well above the close to zero or negative operating balances of its 'B'-rated peers. However, the operating surplus was not sufficient to cover debt servicing needs due to the region's high debt volumes. Capital expenditure partly fuelled by federal election pledges contributed to the region's high overall deficit - 11% of total revenue in 2013.
Sound budgetary performance and reduction of debt to below 60% of current revenue would lead to an upgrade.
Weak operating performance with close to a zero operating surplus, coupled with further growth of short-term debt, would lead to a downgrade.
Company — Astrakhan region
Full nameArkhangel region