Fitch Affirms Russia's Kaluga Region at 'BB'; Outlook Stable
September 28, 2015 Fitch Ratings
Fitch Ratings has affirmed Russian Kaluga Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB' with Stable Outlooks, and its Short-term foreign currency IDR at 'B'. The agency has also affirmed the region's National Long-term rating at 'AA-(rus)' with Stable Outlook. Kaluga's senior unsecured domestic debt has also been affirmed at 'BB' and 'AA-(rus)'.
The affirmation reflects Fitch's unchanged base line scenario regarding the region's sound operating performance and expectation on direct risk stabilisation in relative term.
KEY RATING DRIVERS
The 'BB' rating reflects the administration's efficient and proactive management, the region's rapid investment-driven economic development and sound budgetary performance. The ratings also factor in increasing pressure on operating expenditure and our expectation of a slowdown of economic activity in the region following the negative national trend.
Fitch expects Kaluga to continue demonstrating a solid operating performance, supported by its diversified tax base. The agency expects operating balance to be at 11%-12% of operating revenue in 2015-2017, in line with the 12.0% average in 2013-2014. Tax revenue growth will decelerate but continue in 2015 due to the inflationary expansion of tax base and some increased tax rates. Operating spending will remain under pressure as a result of inflation-driven growth of social transfers to population and spending on goods and services.
Kaluga is focused on local economic development and has been successful in attracting foreign investments, and promoting industrial production and innovation. This policy has allowed the local economy to grow at a cumulative 23.4% in 2011-2014, well above the 10.5% average for the Russian Federation. However, Fitch forecasts a 3.5% contraction of national GDP in 2015, and we believe the region will also face economy contraction, which would have negative repercussions for the region's tax revenue in the medium term.
Based on the budget execution in 1H15, Fitch expects the region's deficit before debt variation to reduce twofold to 5.3% of total revenue from average 11.2% in 2013-2014. This will mostly result from lower capital expenditure and the overall intention of the region's government to implement cost control measures. Fitch therefore forecasts direct risk growth to decelerate in absolute terms during 2015-2017, while operating revenue growth should allow the overall debt burden to stabilise below 75% of current revenue (2014: 73.7%).
Kaluga actively uses PSEs to finance local investment projects. It established the Development Corporation of Kaluga Region (DCKR), which at end-2014 borrowed RUB5.6bn to finance the development of regional industrial zones. The region provides subsidies to cover the principal and interest on DCKR's debt. Consequently, Fitch considers DCKR's liabilities as the region's direct risk. Positively, PSEs liabilities have a long-term maturity profile till 2022.
At 1 September 2015, the region had no outstanding debt due in 2015. However, as with most Russian regions, Kaluga is exposed to refinancing pressure in the medium term. It faces repayment of 81% of its outstanding liabilities, including DCKR's debt, in 2016-2018. Fitch expects the region will roll over maturing budget loans and substitute part of maturing bank loans with new loans from the federal budget. The remaining maturing bank loans will be rolled over with the same banks. However, volatile interest rates in domestic markets could make new debt more expensive and may put pressure on the region's current margin.
Maintaining sound operating performance with an operating margin of 12%-14% and restoring direct debt coverage to be in line with the region's average debt maturity could lead to an upgrade.
Continued deficit before debt variation leading to direct risk increasing above 75% of current revenue and deterioration in direct debt coverage beyond 10 years would lead to a downgrade.
Company — Kaluga region
Full nameKaluga region ministry of finance