Fitch Affirms Russian Region of Krasnodar at 'BB'; Outlook Positive
MOSCOW. June 10 (Interfax) - On Friday, Fitch Ratings affirmed the Russian Region of Krasnodar's Long-term foreign and local currency ratings at 'BB', Short-term foreign currency rating at 'B' and National Long-term rating at 'AA-(rus)'. The Outlooks for the Long-term ratings are Positive.
The agency said in a statement: "The affirmations reflect the region's satisfactory budget performance and still moderate, albeit increasing direct risk. The Positive Outlook reflects Fitch's expectations that investment-driven economic growth will support a tax revenue increase, allowing the region to improve its operating performance in 2011-2013 and reach 14%-16% operating margin. Fitch also expects that the region's debt ratios remain strong by international standards despite expected direct debt increase.
"Fitch notes that an improvement of Krasnodar's operating performance in line with expectations and maintaining direct risk below 25% of current revenue would be positive for the ratings.
"Fitch expects the local economy will demonstrate stable economic growth in 2011-2013, boosted by large federally supported investment programmes, mostly for the 2014 Winter Olympic Games in Sochi, and the development of recreation and gambling zones. Fitch expects region's operating performance to improve in 2011 due to the expansion of the local economy, with the operating balance at about 14% of operating revenue in 2011 and further improvement to 15%-16% in 2012-2013.
"Due to high capital expenditure related to Olympic Games infrastructure development, the region recorded a notable deficit before debt variation of 8.6% of total revenue in 2010. The region is planning further deficit widening in 2011 to about 10% of total revenue due to the continuation of investment programmes. The region intends to reduce the deficit before debt variation in 2012 to 2% and achieve a surplus in 2013.
"Deficit before debt led to a significant increase in the region's direct risk to RUB19.5bn by end-2010 (2009: RUB3.4bn). A strong cash position (RUB12.2bn at 1 January 2011) and a strong payback ratio (direct risk/current balance), which is below the average debt maturity mitigated the increase in debt.. Fitch expects direct risk will increase to RUB26.5bn by end-2011. Despite the absolute debt increase, it remains moderate in relative terms and will not exceed 23% of current revenue over 2011-2013. The payback ratio remains below two years, which is strong given the maturity profile of the region's debt until 2015.
"Krasnodar is located in the southwest of the Russian Federation on the coast of the Black Sea and Sea of Azov. The region has a strong and well-diversified economy and is among the 10 largest Russian regions by nominal gross regional product (GRP). It is the third most populated Russian region, with 5.2 million inhabitants."