Fitch Downgrades Russian Republic of Khakassia to 'BB-'; Outlook Stable
April 25, 2016
Fitch Ratings has downgraded the Russian Republic of Khakassia's Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'BB-' from 'BB' and its National Long-term rating to 'A+(rus)' from 'AA-(rus)', while affirming its Short-term foreign currency IDR at 'B'. The Outlooks on the Long-term ratings are Stable.
Khakassia's outstanding senior unsecured domestic bonds have also been downgraded to 'BB-' from 'BB' and to 'A+(rus)' from 'AA-(rus)'.
The downgrade follows a sharp increase in Khakassia's direct risk, driven by persistently large budget deficits during 2013-2015, while the republic's self-funding capacity remains weak.
KEY RATING DRIVERS
The downgrade reflects the following rating drivers and their relative weights:
In 2015, the republic's direct risk grew 55% to reach RUB16.5bn. As a share of current revenue direct risk was 84.4%, above 2014's 61.5% and our expectations of 70%-75% and no longer commensurate with a 'BB' rating. In 2015 the republic's administration struggled to contain deficit due to increased capital expenditure. As a result the deficit widened to 21% of total revenue from 13% in 2014, resulting in steep debt growth.
Fitch forecasts deficit before debt variation will narrow to 8%-10% in 2016-2018 as the region will likely scale back its capex to about 15% (2015: 30%) and also because more than half of the capex will be funded by earmarked transfers from the federal budget. We forecast the on-going deficit is likely to lead to moderate debt growth, taking direct risk to 100% of current revenue by end-2018.
The republic's direct risk as of 1 April 2016 comprised 42.5% bank loans, 39.8% bond issues and 17.7% budget loans. As in many Russian LRGs, Khakassia's maturity profile is short-term with 81% direct risk maturing in 2016-2018. Fitch expects the republic's refinancing needs will largely be funded by market debt (bond placements and bank loans). This exposes the region to market interest rate volatility and could negatively impact its current balance over the medium term.
Fitch expects the republic's operating margin to consolidate at 5%-6% over the medium term, which will be insufficient to cover interest expenses, due to growing direct risk and increased funding costs. Khakassia's operating margin improved to 6.4% in 2015, from -0.6% in 2014, supported by higher proceeds from corporate income tax (up 31.5% yoy), excise duties (up 15.5% yoy) and property tax (up 9.2% yoy). However, the higher revenue was offset by faster growth of capex, which rose to 30.5% of total expenditure in 2015 from an already high 23.4% in 2014. The high capex was driven by increased investments in social infrastructure and housing construction for victims of large fires that occurred in spring 2015.
Khakassia's wealth metrics are in line with the national median. However the republic's economy is concentrated in the hydro-power generation, mining and non-ferrous metallurgy sectors. The top 10 taxpayers contributed 49.5% to the republic's tax revenue in 2015 (2014: 44.5%). Taxes accounted for 71% of operating revenue in 2015, which makes the region's budget prone to volatility. Fitch forecasts Russia's national economy to contract 1.5% in 2016 and believes the region will also face sluggish economic activity, which could negatively affect Khakassia's tax base.
Khakassia's ratings also reflect the following key rating drivers:
Russia's institutional framework for subnationals is a constraining factor on the republic's ratings. Frequent changes in the allocation of revenue sources and the assignment of expenditure responsibilities between the tiers of government limit Khakassia's forecasting ability and negatively affect its debt and investment management.
An upgrade may result from direct risk decreasing below 60% of current revenue, coupled with a positive current balance on a sustained basis.
A downgrade may result from the republic's inability to curb direct risk growth towards 100% of current revenue, accompanied by growing refinancing pressure.
Company — Republic of Khakassiya
Full nameKhakassiya Republic Ministry of Finance