Fitch upgrades Kaluga to 'BB'; Outlook Stable
MOSCOW. Nov 10 (Interfax) - Fitch Ratings has upgraded the Russian Kaluga Region's Long-term foreign and local currency ratings to 'BB' from 'BB-' and National Long-term to 'AA-(rus)' from 'A+(rus)'. The region's Outlooks are Stable.
The ratings agency said in a statement: "The region's Short-term foreign currency rating has been affirmed at 'B'. The rating action also affects the region's outstanding domestic bonds.
"The upgrade reflects the region's sound budgetary performance, underpinned by its rapid economic development, which supports the tax revenue increase and proactive budget management focused on the region's development. The ratings also factor in the region's increasing total risk, including the liabilities of public sector entities (PSEs), although its profile is long-term.
"Fitch says any further upgrade is subject to a decline of the region's direct risk accompanied by the strong debt coverage of about three years along with a continuous sound operating performance underpinned by economic buoyancy. Conversely, if the region looses control of operating expenditure leading to a widening of the deficit before debt variation, along with an increase in refinancing risk due to short-term debt growth, this would likely lead to downward rating pressure.
"The administration of the Kaluga region is aimed at industrial development through the formation of industrial zones and techno parks, and the attraction of direct foreign investments into the region. This underpinned the fast expansion of the local economy with a 21% yoy growth rate in 2010 driven by 1.5x growth of processing industries. The administration forecasts a continuation of economic growth in the medium term, with gross regional product growing by 14.3% yoy in 2011 and average annual growth of about 10% in 2012-2013.
"Fitch expects that continuous economic growth would lead to a further tax base expansion and drive operating revenue to increase by about 22% in 2011 (2010: 23% growth). The agency expects the full-year operating balance to stabilise at about 16%-17% of operating revenue in 2011-2013, largely unchanged from 2010's 16.4%. The margin stabilisation despite the fast operating revenue growth is a result of increasing pressure on operating expenditure due to the forthcoming national parliamentary elections in December 2011 and preparations for the 2012 presidential elections.
"Large-scale capital spending to develop the region's infrastructure led to a significant increase in Kaluga's debt burden. Direct risk totalled RUB18.3bn at 1 October 2011, and included direct debt and risk stemming from public sector entities' liabilities, particularly those of the Development Corporation of Kaluga Region. Repayment risk is mitigated by a long term debt maturity profile until 2019, which is long compared with national peers. Fitch expects the region's total risk to remain close to RUB18.3bn by end-2011, which is below 60% of its forecasted full-year current revenue (2010: 61%). The agency expects Kaluga's total risk will not exceed that level in 2012-2013.
"Kaluga Region is in the centre of the European part of the Russian Federation, bordering the Moscow Region to the south-west. The region's capital, the City of Kaluga, has 325,200 inhabitants and is located 180km from Moscow. The region accounted for 0.5% of the country's GDP and 0.7% of its population."
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