OREANDA-NEWS. Fitch Ratings has affirmed the Russian City of Tula's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB-' with Stable Outlooks and Short-Term foreign currency IDR at 'B'. The agency has also affirmed the city's National Long-Term rating at 'A+(rus)' with Stable Outlook.

The affirmation reflects our unchanged baseline scenario regarding the city's projected satisfactory fiscal performance and the expected containment of its direct risk below 40% of current revenue in the medium term.

KEY RATING DRIVERS

The ratings reflect Tula's projected structural imbalances, weaker than historical average fiscal performance in the medium term and Russia's weak institutional framework amid a deteriorated macro-economic trend. The ratings also consider the city's low debt with moderate exposure to refinancing risk along with continued support from Tula Region (BB/Stable).

We expect Tula to post a close to zero operating margin in 2016-2018 (2011-2015: average 1.9%). We also expect the city to run a modest deficit before debt variation of about 5%-6% of total revenue in 2016-2018, after its deficit widened to 8% of total revenue by end-2015, from 6.6% a year earlier, underpinned by opex growth.

Fitch expects opex pressure on Tula's fiscal performance to prevail at least in 2016, with the rate of opex growth surpassing that of operating revenue. 80% of the city's opex was inflexible staff costs and current transfers of various kinds in 2012-2015.

We expect Tula's operating revenue to remain almost equally split between taxes and current transfers from 2016 onwards. Its operating revenue was primarily supported by taxes (49% of 2015 operating revenue), followed by current transfers from the regional budget (2015: 42%).

Fitch assesses Russia's institutional framework for local and regional governments (LRGs) as weak and views it as a constraint on the city's ratings. Weak institutions lead to lower predictability of Russian LRGs' budgetary policies, narrow their planning horizon and hamper long-term development plans. The city's policies tend to be shaped by frequent changes in allocation of revenue and expenditure responsibilities between the tiers of government.

Fitch expects Tula to contain growth of its direct risk in 2016-2018, which is likely to remain below 40% of current revenue. We also expect the city to retain use of bank loans as the prime source of budget deficit financing in 2016-2018, supplemented by budget loans from the region. Short-term bank loans comprised 60% of the city's interim debt stock as of end-June 2016, with the remaining 40% composed of budget loans from Tula Region.

We assess the city's exposure to refinancing risk on market-originated debt as moderate, with maturities on 1 July 2016 of RUB1.45bn to be repaid by the year-end. The city's cash position remains weak with RUB101m funds accumulated on a treasury account as of end-June 2016 (2015: RUB220m).

With a population of 551,270 inhabitants, the city is Tula Region's capital and its largest metropolitan area. The region's economy is fairly well diversified with strong industrial profile; industries composed 37% of gross value added in 2013. Economically Tula benefits from its close proximity to the city of Moscow (BBB-/Negative), the country's capital and its largest market.

The region's wealth metrics are close to the Russian median figures, as its average salary was in line with the national median while GRP per capita was 12% below in 2014. In 2015, the estimated growth rate of the region's economy was 2.4% in real terms in contrast to an estimated 3.7% decline of national GDP, reflecting the deterioration of the macroeconomic environment in Russia.

RATING SENSITIVITIES

A sustainable fiscal performance with operating surplus at about 5% of operating revenue and maintenance of moderate direct risk below 50% of current revenue, conducive to sufficient coverage of interest payments would lead to an upgrade.

Material growth of direct risk above 50% of current revenue, along with a deterioration in fiscal performance leading to a weak operating balance that was insufficient to cover interest payments would lead to a downgrade.