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

February 20, 2017 | Cbonds

Fitch Ratings has affirmed the Russian City of Novosibirsk's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) 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 The city's National Long-Term Rating has been affirmed at 'AA-(rus)' with Stable Outlook and withdrawn.

Novosibirsk's senior debt Long-Term ratings have 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 The city's senior debt National Long-Term Rating has been affirmed at 'AA-(rus)' and withdrawn.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 line scenario that the city will continue to record a stable positive current balance and will narrow fiscal deficit, leading to stabilisation of direct risk over the medium term.

The National Scale ratings are being withdrawn because Fitch has withdrawn its Russian National Scale ratings in response to a new regulatory framework for credit rating agencies in Russia (see Fitch Ratings Withdraws National Scale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 ratings reflect Novosibirsk's moderate direct risk with a smooth maturity profile, our expectation of a stable operating margin sufficient to cover interest payment in 2017-2019 and the city's diversified economy. The ratings also factor in Russia's weak institutional framework and a sluggish national economic environment.

In its base case scenario, Fitch expects the city's fiscal performance to be stable, with an operating margin between 6%-8% in 2017-2019, which is close to its average 6.8% in 2015-2016. This will be backed by growth of personal income tax (PIT), which provides about 70% of the city's tax revenue and cost-efficiency measures to limit operating expenditure growth below inflation (Fitch projects a 5.8% consumer price increase for 2017).

According to preliminary data, the city's operating margin increased to 8.6% in 2016 from 5.0% in 2015. The growth was partially due to a one-off tranche of current transfer from the regional budget in December 2016, which was not disbursed during the financial year. However, the operating margin stayed below a sound average 11% during 2011-2014. The deterioration was caused by sharp tax revenue declines due to a 10pp reallocation of PIT to the regional budget in 2015.

Fitch notes that Novosibirsk's tax-generating capacity remains limited and its performance is supported by regular transfers from Novosibirsk Region (BBB-/Stable). Current transfers account for about 35% of the city's operating revenue. However, they are largely earmarked for certain expenditure and do not provide much fiscal flexibility to the city.

Fitch expects the city's direct risk to be about RUB20.1bn by end-2017 (2016: RUB19.6bn), which will marginally increase in 2018-2019 driven by a modest fiscal deficit. In relative terms, direct risk peaked at 59.3% of current revenue in 2016 and we expect it to decline to 55% over medium term on the back of revenue growth exceeding nominal debt increase.

Novosibirsk demonstrates sophisticated debt management. Unlike most Russian peers, the city does not rely on short-term funding. The city's prime source of borrowing is amortising domestic bond issues (51% of direct risk as of 1 January 2017) with up to 10-year maturity followed by revolving lines of credit from local banks with maturity of up to six years (36% of total direct risk). This smooths the city's annual refinancing needs.

With a population of over 1.5 million inhabitants, the city is the capital of Novosibirsk Region and is the largest metropolitan area of Siberian Federal District. The city's economy is diversified, with a well-developed processing industry and service sector. The sound economic performance of local companies supports Novosibirsk's fiscal capacity, with taxes accounting for 47.5% of operating revenue in 2016. Fitch forecasts national GDP will start gradual restoration by 1.3% in 2017 after 0.4% decline in 2016, which should support the city's economic and budgetary performance.

The city's credit profile remains constrained by the weak institutional framework for local and regional governments (LRGs) in Russia. Russia's institutional framework for LRGs has a shorter record of stable development than many international peers. The predictability of Russian LRGs' budgetary policy is hampered by the frequent reallocation of revenue and expenditure responsibilities among government tiers.

RATING SENSITIVITIES
Restoration of the operating margin sustainably above 10% and maintaining direct risk below 60% of current revenue with a debt maturity profile corresponding to the debt payback ratio could lead to an upgrade.

Deterioration of the budgetary performance, leading to an inability to cover interest expenditure with operating balance, and direct risk increasing to above 70% of current revenue would lead to a downgrade.

Company: Novosibirsk

Full company nameNovosibirsk
Country of riskRussia
Country of registrationRussia

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