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

January 30, 2017 | Cbonds

Fitch Ratings has affirmed the Russian City of Tula'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 The city's National Long-Term rating has been affirmed at 'A+(rus)' with Stable Outlook and withdrawn.

The affirmation reflects the city's projected satisfactory fiscal performance and the expected containment of its direct risk below 40% of current revenue in the medium term. The ratings are constrained by a weak institutional framework for Russian local and regional governments (LRGs).

The National-scale rating is being withdrawn because Fitch has withdrawn its Russian National-scale ratings in response to a new regulatory framework for credit rating agencies in Russia (see Fitch Ratings Withdraws National Scale Ratings in the Russian Federation dated 23 December 2016).

KEY RATING DRIVERS
Weak institutions in Russia lead to lower predictability of LRGs' budgetary policies, narrow their planning horizon and hamper long-term development plans. The City of Tula's policies tend to be shaped by frequent changes in allocation of revenue and expenditure responsibilities between the tiers of government.

We project Tula to post an operating margin of 3%-5% over the medium term (2016: 3.3%), on the back of both stable taxes and current transfers from Tula Region (BB/Stable). We also expect the city's deficit before debt variation to remain modest at 3%-4% of total revenue in 2017-2019, close to the 2016 deficit of 2.7%, underpinned by operating expenditure control.

Fitch expects the city's operating expenditure to remain rigid, with 78% pertaining to inflexible staff costs and current transfers of various kinds in 2016. Revenue in Tula is likely to remain almost equally supported by taxes and current transfers over the medium term. The city's operating revenue in 2016 comprised 51% taxes and 41% current transfers from the regional budget.

Fitch expects Tula to contain growth of its direct risk over the medium term at below 40% of current revenue. We also expect the city to retain use of bank loans as the prime source of deficit financing in 2017-2019, supplemented by budget loans from the region. The city's direct risk at end-2016 was 95% composed of bank loans with maturity in 2018, followed by budget loans from Tula Region (5%).

Immediate refinancing risk on market-originated debt has eased after Tula contracted new loans in 2016 with maturities in May to December 2018. The city's liquidity position also improved, with cash holding amounting to RUB574m at end-2016 (2015: RUB220m).

With a population of 551,270 inhabitants, the city is Tula Region's capital and largest metropolitan area. The region's economy is fairly well-diversified with a sound industrial profile; in 2015 the regional economy grew 4.7%, in contrast to the national GRP decline of 3.7%. Economically Tula benefits from its close proximity to the City of Moscow (BBB-/Stable), the country's capital and its largest market.

The region's wealth metrics are close to the Russian median: its GRP per capita was 93% of the national median in 2014. Fitch forecasts national GDP to have declined 0.5% in 2016, followed by sluggish growth in 2017-2018, which in turn could weigh on both the region's and the city's economic and budgetary performance.

RATING SENSITIVITIES
Stable operating surplus of 5% of operating revenue and maintaining moderate direct risk at below 50% of current revenue, with sufficient coverage of interest payments, would lead to an upgrade.

Material growth of direct risk above 50% of current revenue, along with deterioration in fiscal performance leading to a weak operating balance that is insufficient to cover interest payments, would lead to a downgrade.

Company: Tula

Full company name
Country of riskRussia
Country of registrationRussia

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