Fitch affirms Republic of Tatarstan at 'BBB-'; Outlook Stable
MOSCOW. Aug 2 (Interfax) - Fitch Ratings has affirmed the Russian Republic of Tatarstan's Long-term foreign and local currency ratings at 'BBB-' and Short-term foreign currency at 'F3'.
Fitch said in a statement: "The National Long-term rating has been affirmed at 'AA+(rus)'. The Outlooks for the Long-term foreign and local currency and National Long-term ratings are Stable.
"The affirmation reflects Tatarstan's well-diversified economy, improving operating performance, underpinned by fast growth in tax revenue, prudent budget management and strong liquidity. The ratings also reflect the increasing, albeit still moderate, direct risk and contingent exposure in foreign currency.
"Fitch notes that positive rating action is subject to maintaining strong budgetary performance with a stable operating margin of about 25% and containment of the republic's overall risk below 50% of the operating revenue. Conversely, a further increase in overall risk accompanied by weakening of operating performance with deterioration of debt coverage ratio (total risk to operating balance) above six years would lead to a downgrade.
"The republic's economy is based on a strong industrial sector that provides a diversified tax base, so its budget mostly relies on own resources. Operating revenue is dominated by taxes that are linked to economic performance, meaning the budget was positively affected by fast economic recovery in 2010 and 2011 after the 2009 financial crisis.
"Fitch expects Tatarstan will continue to demonstrate strong operating performance in 2012 with operating balance close to 28% of operating revenue. The administration demonstrated a prudent budgetary policy and curbed operating expenditure below inflation (4.6%) while operating revenue grew by 12% in 2011. This led to a significant improvement in the operating balance, which grew by almost 40% in absolute terms. The operating margin improved to 27.6% in 2011 from 22.4% one year earlier.
"Tatarstan continuously records massive investment spending compared to its national peers. In 2011, capital expenditure reached RUB93bn (USD2.9bn) or 50% of total expenditure. Capital revenue - mostly in the form of capital grants from the federal government - covered about 45% of total capital expenditure in 2011. Loans from the federal budget covered another 23% of capex. The bulk of capex was earmarked in preparation for Universiade 2013 (student Olympic games in the City of Kazan, the republic's capital).
"Massive capital expenditure led to a notable deficit before debt variation in 2010 and 2011. This was fully covered by low cost subsidised loans from the federal budget, which increased to RUB60bn in YE11 compared to RUB17.5bn in YE09. However the total debt burden, remains moderate at 56% of current revenue by end-2011. Moreover, RUB25.5bn of Tatarstan's debt represents budget loans lent on to the City of Kazan. If this is netted off, Tatarstan's direct risk is about 35% of current revenue. Additionally, Tatarstan's strong liquidity position (RUB12bn as of end-2011) mitigates its debt exposure.
"The republic has an extended broad public sector, which includes unitary public companies and commercial companies majority-owned by Tatarstan. These companies have a stable financial performance, but add some contingent pressure on the budget. Contingent risk of the republic includes foreign currency-denominated liabilities, which arises from a guarantee on USD250m loan participation notes issued by OJSC Svyazinvestneftekhim, a holding company owned by the government. The LPNs mature in August 2015. This risk is mitigated by the company's strong positive cash flows and in Fitch's view the company will successfully redeem the loan from its own resources."
