OREANDA-NEWS. August 17, 2015. Fitch Ratings has affirmed the Russian City of Samara's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB+' with Stable Outlooks, Short-term foreign currency IDR at 'B' and its National Long-term rating at 'AA(rus)' with a Stable Outlook.

The affirmation reflects Fitch's view that the city will continue to record sound operating balance and moderate direct debt commensurate with its ratings.

KEY RATING DRIVERS
The 'BB+' rating reflects the city's sound budgetary performance underpinned by a diversified local economy and potential financial support from Samara Region. It also factors in the city's moderate direct risk, albeit with a high bias toward short-term bank loans. This exposes the city to high refinancing risk and makes Samara dependent on access to financial markets in order to refinance maturing debt.

Fitch expects the operating balance to hover close to a sound 12% of operating revenue in 2015-2017, which is slightly below our expectations at our last review (15%), but still in line with the rating. This will derive from stagnant operating revenue, and continued growth of inflation-driven operating expenditure, despite cost-efficiency measures implemented by the administration.

The sound operating balance underpins a high self-financing capacity for capex and leads to a low deficit before debt variation of 1.6% of total revenue in 2014 (2013: -5.4%). The city intends to conduct a prudent budgetary policy and keep the deficit under strict control. However, Fitch expects that weak revenue proceeds will cause a deficit before debt variation at 4.3% of total revenue in 2015 and sequential narrowing of deficit to 2% in 2016-2017.

Samara's budgetary performance is underpinned by a diversified tax base as 58% of the city's operating revenue came from taxes in 2014. Another 34% related to current transfers from the economically strong Samara region. The bulk of current transfers is earmarked for financing delegated responsibilities (66% in 2014), mainly public employees' salaries and corresponds to the respective operating expenditure. Samara receives an insignificant amount of financial aid in the form of general purpose grants from the region as its budget capacity is higher than that of other municipalities in the region.

Fitch expects the city's direct risk to remain moderate at 34% of current revenue (RUB6.9bn) by end-2015, slightly up from 30.7% (RUB6.3bn) a year earlier. The city's administration intends to continue its prudent budgetary policy and has budgeted close to a zero fiscal balance for 2016-2017. Fitch considers this scenario as optimistic and forecasts moderate deficit at 2% of total revenue. This should lead to an increase in the direct risk to 37% of current revenue by end-2017. Contingent risk is low as the city does not have outstanding guarantees and its public sector entities are self-sufficient.

Despite the moderate debt burden, Samara is exposed to refinancing risk as it mostly relies on short-term bank loans for deficit financing. During August-December 2015 the city needs to refinance RUB4.6bn of maturing bank loans, and additionally borrow about RUB1bn for deficit financing. To meet this obligation, the city has already contracted several revolving credit lines with local banks totalling RUB2.1bn with one-year maturity and plans several tenders to attract additional RUB3.3bn for refinancing and deficit financing. This mitigates immediate refinancing pressure, but given the short-term maturity of new credit lines, refinancing risk remains in 2016.

With a population of above one million, the city is the capital of Samara region, which has a well-developed diversified economy, based on a processing industries and services. However, Fitch forecasts a 3.5% contraction of national GDP in 2015, and we believe the city will also face a slowdown of its economic activity, which would have negative repercussion on the city's tax revenue.

RATING SENSITIVITIES
Positive rating action is unlikely due to the Negative Outlook on the sovereign's IDRs (BBB-/Negative/F3). However, maintenance of a strong budgetary performance and debt metrics, particularly lengthening the debt maturity profile could be positive for the ratings.

Deterioration of the budgetary performance leading to a significant increase in direct risk above 50% of current revenue (2014: 30.1%) along with the inability to lengthening its maturity profile would lead to a downgrade.