(The following statement was released by the rating agency)
Oct 11 - Fitch Ratings has revised Russia's Ivanovo Region's Outlook toNegative from Stable. Fitch has also affirmed the region's Long-term foreign andlocal currency rating at 'BB-', its Short-term foreign currency rating at 'B'and National Long-term rating at 'A+(rus)'.
The Outlook revision reflects the agency concern over the region's weakoperating performance, poor debt coverage and the local economy's small sizewith wealth indicators well below average. The ratings also take into accountthe still moderate, albeit growing, direct debt, and moderate refinancing riskas a result of improving debt management and sound liquidity.
Fitch notes that the region's inability to cover its debt servicing needs fromits own sources (operating balance and cash reserves) and/or a significantincrease in short-term direct debt leading to high refinancing pressure wouldlead to a downgrade.
Fitch forecasts the region's budgetary performance will remain weak in 2012 witha negative operating balance equal to 0.5% of operating revenue. This is due tooperating expenditure pressure driven by promises made during the elections of2011-2012 which were not compensated by tax revenue and current transfers fromthe federal budget growth. Additional responsibilities on medical care alsofuelled an increase in expenditure. Operating balance will gradually improve in2013-2014 but remain weak.
Weak self-financing capacity for capital outlays makes Ivanovo highly dependenton federal capital grants for capex financing. Capital revenue, comprised ofcapital transfers from the federal budget, covered about 75% of capex in 2011.Current transfers also play an important role and accounted for 47% of operatingrevenue in 2011. However, the transfers stabilise the region's budgetaryperformance and smooth out the effects of negative economic cycles.
Ivanovo has weak debt coverage due to its negative operating balance, so theregion relies significantly on external financing for capital expenditure. Theregion recorded a high rate of debt increase in the past two years albeit from alow level and the debt burden remains moderate. Fitch forecasts direct risk toincrease to about RUB7.5bn or 29% of current revenue in 2012 and graduallyincrease to 35%-40% of current revenue in 2013-2014.
The region improved its debt management in 2012 and began to rely on medium termborrowing instead of short-term one-year bank loans as in 2011. Fitch estimatesthe refinancing needs of the region as low in 2012 and 2013. The region hasalready made all repayments for 2012 and refinancing needs in 2013 are about 15%of expected full-year direct risk. The peak of refinancing falls in 2014 whenthe region needs to repay about RUB3.6bn.
The region accumulated a significant RUB2.35bn cash balance at 1 January 2012.Fitch expects that this accumulated cash will cover up to 60% of its budgetdeficit in 2012, which will limit any direct risk increase.
The Ivanovo Region is located in the central part of European Russia. Itscapital, the City of Ivanovo, is 275km north-east of Moscow. The region'ssocio-economic profile is weaker than the average Russian region. With apopulation of 1.1 million (0.7% of the national population) it contributed 0.3%of Russia's gross regional product.
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(Caryn Trokie, New York Ratings Unit)