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Fitch Affirms Russian City of Tomsk at 'BB'; Outlook Stable

February 20, 2017 | Cbonds

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 The city's National Long-Term rating has been affirmed at 'AA-(rus)' with a Stable Outlook and withdrawn.

The city's senior debt long-term rating has been affirmed at 'BB'. The city's senior debt National long-term rating has been affirmed at 'AA-(rus)' and withdrawn.

The affirmation reflects Fitch's unchanged base case scenario regarding Tomsk's adequate fiscal performance and moderate debt over the medium term.

The National-scale rating is being withdrawn because Fitch has withdrawn its Russian National-scale ratings in response to a new regulatory framework for credit rating agencies in Russia (see "Fitch Withdraws National Scale Ratings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

KEY RATING DRIVERS
The 'BB' ratings reflect the city's satisfactory budgetary performance with a sustainable current balance and moderate deficit before debt variation, which is supported by a diversified local economy and steady transfers from the Tomsk region. The ratings also factor in the city's moderate debt and a weak institutional framework for Russian sub-nationals.

Fitch projects Tomsk's operating balance to stabilise at 6%-7% of operating revenue in 2017-2019, which is close to its average level in 2015-2016 of 7.8%. This will be supported by gradual growth of personal income tax, which provides more than 50% of the city's tax revenues, and higher personal property taxes resulting from a growing tax base and ceased tax privileges for certain categories of taxpayers.

Tomsk's tax-generating capacity, however, remains limited and revenues are supported by regular transfers from Tomsk region. Current transfers account for about half of the city's operating revenue. However, they are largely earmarked for certain expenditures and, hence, do not provide much fiscal flexibility to the city.

Fitch projects the city will record a moderate deficit before debt of about 3% of total revenue in 2017-2019. In 2016, the deficit narrowed to a low RUB215 million, or 1.6% of total revenue, from 5.3% in 2015, despite capex increasing to 23% of total expenditure (2015: 17%). The smaller deficit resulted from operating expenditure restraint and a higher reliance on capital transfers, which funded 65% of capex in 2016 (average in 2013-2015: 42%). Fitch expects the city will continue this prudent policy over the medium term.

Fitch forecasts Tomsk's direct risk to remain below 40% of current revenue in 2017-2019 (2016: 31%) on the back of a moderate deficit. Contingent risk is likely to remain low as the city does not have outstanding guarantees and its public sector is small and mostly self-sufficient. In 2016, Tomsk's debt grew by a marginal RUB131 million to RUB3.6 billion. As of 1 February 2017 the city's debt comprised 48% bonds and 52% bank loans.

Fitch assesses the city's refinancing risk as moderate, as its debt repayments are spread between 2017 and 2021. At end-2016, Tomsk issued RUB1 billion bonds with a five-year maturity, which somewhat reduced its refinancing pressure. In 2017, the city needs to repay RUB839 million, or 26% of its outstanding debt as of 1 February 2017. These funding needs are sufficiently covered by RUB1.3 billion undrawn credit lines, which are available to the city on first demand.

Tomsk has a well-diversified service-oriented economy, dominated by academic and research educational institutions. The tax concentration of the city's revenue is low, with the top 10 taxpayers representing less than 10% (2015: 13%) of total tax revenue in 2016. Fitch forecasts national GDP will rebound 1.3% in 2017 after a 0.4% decline in 2016, which should support the city's economic and budgetary performance.

The City of Tomsk's credit profile remains constrained by the weak institutional framework for local and regional governments (LRGs) in Russia, which has a shorter record of stable development than many of its international peers. The predictability of budgetary policy and forecasting ability are hampered by the frequent changes in the allocation of revenue sources and in the assignment of expenditure responsibilities between the tiers of government.

RATING SENSITIVITIES
Direct risk increasing to above 50% of current revenue, coupled with growing refinancing pressure, could lead to a downgrade.

Improvement of the operating balance to 12%-14% of operating revenue, coupled with maintenance of healthy debt metrics, could lead to an upgrade.

Company: Tomsk

Full company nameTomsk City Government
Country of riskRussia
Country of registrationRussia

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