OREANDA-NEWS. Fitch Ratings expects Russian local and regional governments' (LRGs) budgetary performance and creditworthiness to come under pressure from a deceleration of tax revenue growth and higher capex in 2H15.

The agency will assess the severity of such deterioration individually when monitoring the LRGs' ratings. As of today, 19 out of 45 LRGs rated by Fitch are on Negative Outlooks.

Fitch expects the two largest tax items - personal income tax (PIT) and corporate income tax (CIT), which contributed 70% of Russian LRGs' tax revenue in 2014 - will see slower growth in 2H15 amid a difficult economic environment exacerbated by low oil prices, a weak rouble and US and EU sanctions. Fitch does not expect the federal government to compensate Russian LRGs for slower tax revenue growth.

Fitch forecasts LRGs will end 2015 with a total deficit of about RUB400bn, or 4% of total revenue. In 1H15, Russian LRGs recorded a RUB436bn surplus in aggregate, which corresponds to 8% of total revenue (1H14: 3%). This was driven by strict control over expenditure, which saw a subdued 6% yoy increase, significantly below the country's 16% inflation while revenue grew 12%, driven by a one-off increase in CIT.

CIT grew an impressive 26% yoy in 1H15, which partially compensated weak PIT collection during the same period. However, in Fitch's view CIT growth will decelerate in 2H15 as the one-off effect of rouble depreciation winds down and financial performance in the corporate sector weakens. In 1H15 CIT proceeds were supported by higher profits of export companies, which benefited from sharp rouble depreciation at end-2014. High military procurements financed by the federal budget were also supportive of CIT growth.

In 1H15 PIT declined for 17 regions and total PIT collection grew only 4% yoy, which was below the Russian LRGs' expectation. Most of the regions rated by Fitch are forecasting 7% PIT growth in 2015 based on economic projections provided by the federal government at end-2014. Federal authorities now expect salaries to grow on average 3.9% for 2015, down from the 7%-9% previously expected.

The average salary increased by a moderate 5% yoy in 1H15, slower than the 9% growth in 1H14. Salaries within the public sector remained unindexed or have been increased by a low 5% in 2015 to ease pressure on the LRGs' budget amid challenging economic conditions. This followed the federal government's decision to cease further salary increases for certain types of public employees as declared by the presidential decree of 2012.

Within the private sector salaries are more sensitive to the economic slowdown. Companies freeze wages, cancel bonus payments, turn to part-time employment, and in more challenging circumstances, delay payment of salaries or pay salaries through tax evasion. Other factors weighing on PIT proceeds are reduced dividend payments to individuals due to a decline in corporate profits as well as increased individual tax deduction on newly acquired dwellings.