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Fitch Affirms Russia's Republic of Sakha (Yakutia) at 'BBB-'; Outlook Stable

February 20, 2017 | Cbonds

Fitch Ratings has affirmed the Russian Republic of Sakha's (Yakutia) Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BBB-' with Stable Outlooks and Short-Term Foreign Currency IDR at 'F3'. The republic's National Long-Term Rating has been affirmed at 'AA+(rus)' with Stable Outlook and withdrawn.

The republic's senior debt ratings have been affirmed at long-term local currency 'BBB-'. The republic's senior debt National long-term rating has been affirmed at 'AA+(rus)' and withdrawn.

The affirmation reflects Fitch's largely unchanged base case scenario regarding Sakha's low debt by international standards and strong fiscal performance, which should help keep key credit metrics sound.

The National-scale rating is being withdrawn because Fitch has withdrawn its Russian National-scale ratings in response to a new regulatory framework for credit rating agencies in Russia (see Fitch Ratings Withdraws National Scale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
The 'BBB-' rating reflects Yakutia's low, but slowly growing, direct risk, and restored strong operating performance, which is supported by a resource-based economy. The ratings also factor in sizeable contingent liabilities and public sector debt as well as the concentrated nature of Sakha's tax base, which exposes the republic to market volatility.

Fitch projects the republic's budgetary performance will remain strong with a 16%-18% operating margin over the medium term. This will be supported by a gradual growth of tax revenues amid revival of overall economic growth in Russia. Fitch projects Russia's GDP will grow 1.3% in 2017. The republic will also benefit from its ownership of a 33% stake in leading global raw diamond producer Alrosa (BB+/stable) as the company plans to increase dividend payments, which constitute a significant share of Yakutia's revenues. In the medium term property tax will be contributing more revenue as large capex projects become operational (new diamond mine, gas pipeline to China, thermal power plant and others).

In 2016, Yakutia's operating balance stabilised at a high 16.9% of operating revenue (2015: 17.8%), up from an average 9.6% in 2012-2014. This was driven by 29% yoy growth in corporate income tax proceeds, mainly from the diamond mining sector amid a pick-up in diamond demand. However, the performance of this sector remains volatile and is prone to FX fluctuations. Deficit before debt remained small at 3.3% in 2016, down from 5.3% in 2015, resulting in mild debt growth.

Fitch expects Sakha to maintain low debt at below 25% of current revenue in the medium term (2016: 20%). Direct risk increased to RUB34.2 billion at end-2016 from RUB27 billion a year earlier. Sakha's debt portfolio is diversified with 45% domestic bonds, 36% subsidised federal budget loans at 0.1% interest rate and 16% bank loans. The weighted average maturity of debt of Sakha is 2.4 years, above its debt payback ratio of 1.3 years, indicating structural financial sustainability.

As with most regions in Russia, Yakutia is exposed to refinancing pressure in 2017-2019 when 86% of direct risk (RUB29.3 billion as of end-2016) matures. Despite a concentrated debt maturity profile, the republic has manageable refinancing risks due to historically low debt, sound liquidity and access to federal loans. For 2017 refinancing needs are limited to RUB3.6 billion amortising bonds, RUB3.5 billion budget loans and RUB1 billion bank loans, which the republic plans to refinance with RUB5 billion domestic bonds, RUB2.7 billion budget loan and new bank loans. Cash liquidity was strong at RUB2 billion as of 1 January 2017.

The republic's exposure to contingent risk is likely to remain sizable at 23.6% of current revenue. However, Yakutia's net overall risk is still consistent with the current ratings after it increased slightly to 42.7% of current revenue in 2016 from 39.5% in 2015. Fitch forecasts net overall risk to stabilise at 43%-45% of current revenue by 2019. Sakha provides support to its infrastructure across the region's vast territory amid harsh climatic conditions but a disproportionate growth of contingent risk will put the region's creditworthiness under pressure.

Sakha has a strong economic profile supported by rich deposits of natural resources, such as diamonds, coal, oil, natural gas and gold. The republic provides 30% of global raw diamond supply. This exposes Yakutia to concentration risk as the top 10 largest taxpayers contributed 60% of total tax proceeds in 2016. The region's prime taxpayers are mostly national champions in natural resources and export-oriented companies (Alrosa, Surgutneftegaz, Mechel, etc.).

Yakutia's strong economy and small population result in strong wealth metrics. In 2014 gross regional product (GRP) per capita was 2.2x above the national median, while average salary was 2.5x above the national median. According to preliminary data, in 2016 GRP grew 1.9% yoy, outperforming the national GDP contraction of 0.4%. According to the administration's forecasts the republic's GRP growth will accelerate to 3%-5% in 2017-2019.

The republic's credit profile is 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.

RATING SENSITIVITIES
The republic'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, provided Yakutia's budgetary resilience also strengthens, leading to a sustainable operating margin above 15% and controlled contingent liabilities.

A downgrade of Russia or growth of net overall risk to above 50% of current revenue, coupled with a sharp deterioration of its direct debt-to-current balance ratio, would lead to a downgrade.

Company: Republic of Sakha (Yakutia)

Full company nameFinance Ministry of the Republic of Sakha (Yakutia)
Country of riskRussia
Country of registrationRussia

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