OREANDA-NEWS. September 15, 2015.  Fitch Ratings has affirmed the Russian City of Krasnoyarsk'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 'AA-(rus)' with a Stable Outlook.

The affirmation reflects Fitch's unchanged base line scenario and expectation that the city will continue to record a sound operating performance and moderate direct debt commensurate with its ratings.

KEY RATING DRIVERS
The 'BB' rating reflects the city's moderate direct risk, continuously positive current balance and developed local economy, although it is exposed to the current negative national economic trend. The ratings also factor in Fitch's expectation of Krasnoyarsk's ability to demonstrate stable budgetary performance and control direct risk at below 50% of current revenue in the medium term.

Fitch expects Krasnoyarsk to record a stable operating balance close to 6% of operating revenue. Revenue proceeds will demonstrate a weak dynamic due to the sluggish economy in the medium term, which should be offset by cost-efficiency measures implemented by the city. The city recorded a 6.6% operating balance in 2014, which was fully sufficient for its interest payments. However, the operating balance was not fully restored after drop in 2013 below 5% and Fitch does not expect it will return to its sound level of 2010-2012 (average 11.3%).

Fitch expects the city could face a slowdown of tax proceeds in 2015 due to the negative macroeconomic environment. Krasnoyarsk's largely relies on taxes, which accounted for 45% of operating revenue in 2014. Personal income tax (PIT) - the major revenue source, accounting for 60% of tax revenue - has already demonstrated a slower dynamic in 8M15 and declined by 3.7% yoy. Fitch expects a moderate restoration of the tax proceeds in 2H15, and forecasts full-year tax revenue to be close to 2014's outturn.

Transfers (both current and capital) from the Krasnoyarsk region (BB+/Stable) have also declined by a notable 22% yoy during the first seven months of 2015. This was mostly due to the reallocation of some opex linked to the social support of population to the regional budget. Following this reallocation, the region cut the respective earmarked transfers to the city's budget. The bulk of current transfers is earmarked for financing delegated responsibilities (83% in 2014), mainly public employees' salaries. Following the cut in transfers, total expenditure declined by 12% during January-July 2015 compared with the previous year.

Fitch expects that weaker revenue proceeds will not be fully offset by expenditure decline and Krasnoyarsk's full-year deficit before debt variation will increase to 4.3% of total revenue from 3.6% in 2014. The deficit will be covered by new borrowings, so Krasnoyarsk's debt burden will reach RUB9.8bn (43.3% of current revenue) by end-2015 up from RUB8.7bn (35.7%) a year earlier. Fitch expects the city's direct risk continue to demonstrate moderate growth in 2016-2017 and reach RUB11.3bn (46% of current revenue) by end-2017.

The city's administration intends to limit the budget deficit so that its debt burden will remain below 50% of current revenue in 2016-2017. Contingent risk is low as the city does not have outstanding guarantees and its public sector entities are self-sufficient.

Like most Russian subnationals, Krasnoyarsk is exposed to some refinancing risk. It has to repay RUB3.3bn of bank loans and RUB0.9bn of budget loans till end-2015. This is equivalent to 43% of total direct risk as of 1 August 2015. This risk is mitigated by RUB845m accumulated cash and unused outstanding RUB4.4bn credit lines with several Russian banks, which fully offsets bank loans coming due in 2015.

With a population of above one million, the city is the capital of Krasnoyarsk Region, one of the top 10 Russian regions by gross regional product. It has a strong industrial sector, which provides a strong tax base but exposes the city to volatile business cycles. 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 repercussions for the city's tax revenue.

RATING SENSITIVITIES
Maintenance of direct risk below 50% of current revenue, coupled with the recovery of a sound budgetary performance with a sustainable operating margin at about 15%, would lead to an upgrade.

Deterioration of budgetary performance with an operating margin permanently below 5%, coupled with increasing refinancing pressure stemming from short-term bank loans, would lead to a downgrade.