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Fitch Affirms City of Nizhniy Novgorod at 'BB'; Outlook Negative

July 27, 2015 Fitch Ratings
Fitch Ratings-Moscow/London-24 July 2015: Fitch Ratings has affirmed the Russian City of Nizhniy Novgorod's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB' with Negative Outlooks, Short-term foreign currency IDR at 'B' and National Long-term rating at 'AA-(rus)' with a Negative Outlook.

The affirmation and Negative Outlook reflects strong pressure on the ratings due to persistence of high refinancing risk and expectation of a weak budgetary performance.

The 'BB' rating reflects the city's ongoing fiscal deficit and refinancing pressure from the large proportion of short-term bank loans in the city's direct risk structure. The ratings also factor in the city's developed local economy, and moderate, albeit growing, direct risk.

The short-term maturity profile of Nizhniy Novgorod's debt is a risk, as the city will have to repay about 80% of its direct risk by end-2015. During August-December 2015 the city needs to refinance RUB4.65bn of bank loans, and additionally borrow about RUB2bn for deficit financing. To meet this obligation, the city has already contracted several credit lines with Sberbank (BBB-/Negative/F2) totalling RUB5bn with one-year maturity and bearing 13.15% annual interest rate. This mitigates immediate refinancing pressure, but given short-term maturity of new credit lines, refinancing risk remains and just shifts to 2016.

Fitch expects the city's direct risk will grow to RUB8.5bn by end-2015 from RUB6.8bn in 2014. We forecast a deficit of RUB2bn in 2015 and averaging RUB1.3bn for 2016-2017, extending the deficit trend since 2008. Despite absolute growth in direct debt, it should remain moderate and below 45% of current revenue by end-2017.

Fitch expects the operating performance in 2015-2017 will remain weak, with the operating balance hovering at 2% of operating revenue and a negative current balance. The city's budgetary performance deteriorated in 2014, when the operating balance declined to 1% of operating revenue from a sound 6% one year later. This was caused by both continued pressure on operating expenditure and lower than expected tax collection amid a negative macroeconomic environment.

Fitch expects tax revenue to decline by 8.8% in 2015 due to both the sluggish economy and the cut in the share of personal income tax (PIT) allocated to the city to 18pp in 2015 from 23pp in 2014. An increase in current transfers from the regional budget will compensate for the PIT share decline in 2015. However, the bulk of current transfers is earmarked for financing delegated responsibilities of the region, mainly public employees' salaries, and will cause a respective increase in operating expenditure.

With a population of above one million, the city is the capital of Nizhniy Novgorod region (BB/Negative/B), one of the top 15 Russian regions by gross regional product, providing an industrialised and diversified tax base. The city receives only modest general-purpose financial aid from the region as its budget capacity is higher than the average municipality in the region. About half of the city's operating revenue comes from taxes, which are under pressure due to the worsening of the national economic environment. Fitch forecasts a 3.5% contraction of national GDP in 2015, and believes the city will also face a slowdown in its economic activity, which would lead to a deterioration of the city's self-financing capacity.

A downgrade may result from the inability to ease refinancing pressure by lengthening the debt maturity profile coupled with weak budgetary performance with a continuously negative current balance.
  • Full name
    Nizhny Novgorod finance department
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