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Fitch Affirms Russia's Mordovia Republic at 'B+'; Outlook Stable

February 20, 2017 | Cbonds

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 The republic's National Long-Term Rating has been affirmed at 'A-(rus)' with Stable Outlook and withdrawn.

The republic's senior debt ratings have been affirmed at long-term local currency 'B+'. The republic's senior debt National Long-Term Rating has been affirmed at 'A-(rus)' and withdrawn.

The affirmation reflects Fitch's unchanged base line scenario regarding Mordovia's high direct risk and fragile current balance leading to weak debt payback metrics.

The National Scale ratings have been withdrawn because Fitch has withdrawn its Russian National Scale ratings in response to a new regulatory framework for credit rating agencies in Russia (see 'Fitch Ratings Withdraws National Scale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 'B+' ratings reflect Mordovia's volatile operating performance and high direct risk, resulting from large capital expenditure that is mitigated by significant exposure to long-term low-cost budget loans. The ratings also consider our expectation that the republic will continue to receive support from the federal government ahead of hosting the world football championship FIFA 2018, while its own financial flexibility will remain weak.

Fitch projects that Mordovia's direct risk will remain high at 130%-140% of current revenue (2016: 121%) as the region will likely continue to record a deficit before debt variation over the medium term. Further debt growth would negatively influence the republic's credit strength.

The republic has low flexibility in expenditure, which is also fuelled by preparations for FIFA 2018. The national presidential election in 2018 also could put pressure on operating expenditure. We project the deficit will be above 10% of total revenue in 2017-2018 before narrowing moderately to below 10% after 2018 due to completion of infrastructure projects.

In 2016, Mordovia's direct risk grew to RUB38.6bn from RUB34.7bn at end-2015 and we expect it could reach RUB42.4bn by end-2017. In mitigation, 59% of the risk (RUB22.6bn) is budget loans that the federal government provided to the republic at a preferential 0.1% interest rate. In addition RUB8.6bn of those budget loans are long-term and mature between 2023-2034. Fitch expects that Mordovia will continue to receive support from the state over the medium term.

Immediate refinancing risk is moderate, as the republic needs to repay RUB2.7bn (7% of direct risk) of budget loans in 2017. The republic's refinancing risk is concentrated in 2018-2019 when RUB22bn or 57% of direct risk will mature. To meet this obligation Mordovia plans to issue domestic bonds in 2018 and 2019. Additional funding could come from new loans from domestic banks.

Fitch forecasts Mordovia's operating performance will be stable over the medium term, with an operating balance at 8%-10% of operating revenue (pre-closing 2016: 10.7%) and low current balance at 1%-2% of current revenue due to growing interest payments. We expect that the republic's tax capacity will remain modest due to weak tax base and federal transfers will constitute a significant proportion of Mordovia's budget, averaging about one-third of revenue annually in 2017-2019.

In 2016, Mordovia's economy was estimated by the republic's government to have grown 4.6% while the national economy contracted 0.4% (Fitch's estimate). The growth was supported by a developing agricultural sector and FIFA championship-related construction. Nevertheless, we expect that the republic's wealth metrics will remain low with GRP per capita being 70%-75% of the national median (2014: 73%).

Russia's institutional framework for sub-nationals is a constraining factor on the region's ratings. Frequent changes in the allocation of revenue sources and in the assignment of expenditure responsibilities between the tiers of government hampers the forecasting ability of local and regional governments in Russia. The republic's budgetary performance, in particular, is reliable on support provided by the state.

RATING SENSITIVITIES
Continuous growth of direct risk towards 150% of current revenue (2016: 121%), or negative current balance on permanent base, would lead to a downgrade.

Sustainable narrowing of fiscal deficit leading to debt stabilisation and strengthening of the debt payback (direct risk to current balance) towards 20 years (2016: 34 years), could lead to an upgrade.

KEY ASSUMPTIONS
The republic will continue to have reasonable access to federal budget loans to enable it to refinance maturing budget loans.

Company: Mordovia republic

Full company nameThe Mordovia Republic Ministry of Finance
Country of riskRussia
Country of registrationRussia

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