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Fitch Affirms Russian City of Nizhniy Novgorod at 'BB-'; Outlook Stable

July 25, 2016
Fitch Ratings has affirmed the Russian City of Nizhniy Novgorod's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB-', with Stable Outlooks, and Short-Term Foreign Currency IDR at 'B'. The agency has also affirmed the city's National Long-Term Rating at 'A+(rus)' with Stable Outlook.

The affirmation reflects Fitch's unchanged base case scenario regarding Nizhniy Novgorod's weak operating balance, and increasing direct risk driven by an ongoing deficit before debt variation over the medium term.

The ratings reflect the city's a moderate, but short-term, direct risk, a low operating balance that is insufficient to cover interest payment and a weak institutional framework for Russian sub-nationals. The ratings also factor in a diversified local economy and potential support from the Nizhniy Novgorod Region (BB/Negative/B).

Fitch expects the city's current balance to remain negative over the medium-term, weighed down by growing direct debt and high interest rates on the domestic capital market. At the same time Fitch is projecting a modest recovery of the operating margin to 1%-2% over 2016-2018, after a close to zero margin during 2014-2015. This is based on our expectation that the administration will keep operating expenditure growth below operating revenue growth.

Fitch expects direct risk will grow to RUB9.5bn by end-2016, from RUB8.2bn in 2015. We project a deficit at 6.8% of total revenue for 2016 (2015: deficit 6%) and 5.9% by 2018. Despite growth, direct debt remains moderate and should stay below 55% of current revenue up to end-2018.

Historically the City of Nizhniy Novgorod's debt had been biased towards one-year bank loans, which led to ongoing refinancing pressure. In 2016 the city has contracted several three-year bank loans totalling RUB3.7bn (46% of total debt stock as of 1 July 2016), extending its debt repayment profile till 2019 and mitigating refinancing pressure. However, the city still has to repay RUB2bn of bank loans and RUB1bn short-term treasury loans (34% of direct risk) during 2H16. Fitch expects the city to be able to refinance its maturing liabilities, although the short-term tenor of its debt means that it will continue to face refinancing risk.

The city has a population of 1.3 million and is the capital of Nizhniy Novgorod Region, one of the top 15 Russian regions by gross regional product, which provides an industrialised and diversified tax base. The city receives negligible general-purpose financial aid from the region as its fiscal capacity is stronger than the average municipality in the region. Fitch forecasts a 0.7% decline of national GDP in 2016, which in turn will weigh on the city's economic and budgetary performance.

The City of Nizhniy Novgorod's credit profile remains constrained by the weak institutional framework for local and regional governments (LRGs) in Russia. Russia's institutional framework for LRGs has a shorter record of stable development than many international peers. The predictability of Russian LRGs' budgetary policy is hampered by the frequent reallocation of revenue and expenditure responsibilities among government tiers.

A downgrade may result from a further increase of the city's direct risk, driven by short-term financing, to above 60% of current revenue, and weak budgetary performance with a continuing negative current balance.

An upgrade may result from direct debt stabilising at below 50% of current revenue, coupled with a lengthening of the debt maturity profile and improvement of budgetary performance with a positive current balance on a sustained basis.
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    Nizhny Novgorod finance department
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