Fitch Affirms Russia's Leningrad Region at 'BBB-'; Outlook Stable
November 29, 2016
Fitch Ratings has affirmed the Russian Leningrad Region's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB-', Short-Term Foreign Currency IDR at 'F3' and National Long-Term Rating at 'AA+(rus)'. The Outlooks on the Long-Term IDRs and the National Long-Term rating are Stable.
The region's outstanding senior unsecured domestic bonds have been affirmed 'BBB-' and 'AA+(rus)'.
The affirmation reflects Fitch's unchanged baseline scenario regarding the region's sound budgetary performance, strong cash position and low direct risk.
KEY RATING DRIVERS
The ratings reflect the region's low debt, strong liquidity and a positive net cash position, resulting from sound budgetary performance. The ratings also take into account a well-diversified local economy, which however has decelerated following the national economic downturn. These factors are balanced against a weak institutional framework for Russian subnationals.
Fitch expects Leningrad Region to maintain sound budgetary performance over the medium term, with an operating margin of 15%-17%, after the peak of 26%-29%. In 2014-2015, Leningrad Region's record high budgetary performance was supported by tax base redistribution within consolidated groups of taxpayers and rouble depreciation, which inflated corporate income tax (CIT) proceeds from oil and gas companies. We expect CIT proceeds to fall as the positive effect of rouble depreciation on corporate income wears off. Accompanied with operating expenditure growth , this should bring region's operating performance down to its historical average.
During 9M16 the region recorded a significant RUB9.7bn budget surplus due to the postponement of capex payment to year-end. We expect higher spending over 4Q16 to lead to a smaller full-year surplus of RUB6.5bn, or 6% of the region's revenue (compared with RUB12.2bn surplus or 10.9% in 2015). Fitch estimates the region will continue to run budget surpluses over the medium term, leading to increased cash reserves and income on deposits.
We expect taxes to constitute up to 90% of operating revenue over the medium term (2011-2015: average 86%). Tax concentration has increased considerably with the 10 largest taxpayers contributing 39.8% of total tax revenue in 2015, up from 27.6% in 2013. This leaves the region's revenue prone to volatility. Positively, this risk should be mitigated by the region's conservative financial policy and sound liquidity resulting in fiscal flexibility.
Fitch expects the region's direct risk will remain low by both national and international standards at 8%-9% of current revenue over the medium term. In 2015, direct risk decreased to 7.9% of current revenue from 9.3% a year earlier. Debt coverage (direct risk-to-current balance) was well below one year in 2015. The region turned net cash-positive in 2014, with cash reserves and deposits exceeding both direct risk and contingent liabilities, which indicates structural financial sustainability.
Contingent risk is represented by guarantees (RUB1.5bn as of 1 October 2016). In 2015 one of the guarantees was called by the creditor (RUB0.6bn for Ust-Luga port). The regional administration came to an amicable agreement with the creditor and in 2016 made settlement payments, thus fulfilling its obligations under the guarantee in full amount and a timely manner. Guarantees are likely to grow, but should remain manageable. In Fitch's view contingent liabilities constitute immaterial risk given current low levels of debt and strong operating performance.
Fitch assesses refinancing risk for the region as low. Its 2016 maturities constitute RUB3.1bn and are well-covered by cash holdings. The region's liquidity remains strong, with cash at 1 October 2016 totalling RUB38.8bn, of which RUB34.2bn were deposited in the largest Russian banks.
Leningrad Region has a diversified economy with a focus on industry, transport, agriculture and food processing. Its wealth indicators are strong with a GRP per capita at 121% of the national median in 2014. In 2015, the region's GRP decreased 0.7%, outperforming the national economy, which fell 3.7%. Its location on the Baltic shore makes Leningrad Region Russia's strategic export-import hub, while proximity to the second-largest city in Russia - St. Petersburg - provides a large market for local companies.
Fitch views the region's credit profile as being constrained by the weak Russian institutional framework for sub-nationals, which has a shorter record of stable development than many of its international peers. The predictability of Russian local and regional governments' budgetary policy is hampered by the frequent reallocation of revenue and expenditure responsibilities within government tiers.
The region's ratings are at the same level as Russia's, therefore positive changes to the sovereign ratings could be positive for the region's ratings, should the region's economic diversification strengthen, leading to reduced tax concentration.
Downgrade is unlikely due to the region's strong credit metrics, unless the sovereign is downgraded. However, sustained deterioration of the region's budgetary performance leading to materially weaker debt coverage above 10 years (2015: 0.2 years) would result in negative rating action.
Company — Leningrad region
Full nameCommittee of finance of Leningrad region