OREANDA-NEWS. November 18, 2015. Fitch Ratings has affirmed the Russian City of St. Petersburg's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-', Short-term foreign currency IDR at 'F3' and National Long-term rating at 'AAA(rus)'. The Outlooks are Negative on the Long-term IDRs and Stable on the National Long-term rating.

The city's outstanding senior unsecured domestic bonds have also been affirmed at 'BBB-' and 'AAA(rus)'.

The affirmation reflects Fitch's unchanged baseline scenario regarding St. Petersburg's sound budgetary performance and low direct risk over the medium term. The city's ratings are constrained by the ratings of Russia (BBB-/Negative).

KEY RATING DRIVERS
The ratings reflect St. Petersburg's net cash positive position, resulting from low debt, and strong liquidity, and its sound operating performance. They also consider the negative macro-economic environment, which puts pressure on the city's diversified, but slowing economy. The Negative Outlook reflects that on the sovereign's ratings.

Fitch expects St. Petersburg to maintain a sound fiscal performance in the medium term, with operating surplus at about 13% (2014: 14.7%), which is supported primarily by the city's sound tax base. Growth rate of tax revenues is likely to decelerate to about 1%-2% in 2015-2017, in line with the depressed macro-economic trend in Russia (Fitch forecasts GDP contraction of 4% yoy in 2015). St. Petersburg's 2014 operating revenue comprised 88% taxation, mainly composed of corporate and personal income taxes.

Fitch estimates the city's deficit before debt variation to halve to 1.7% of total revenue in 2015 from 3.4% in 2014. The deficit is mostly capex-driven and tightly-controlled. We expect St. Petersburg to maintain sound self-financing capacity (SFC) on capex with the current balance and capital revenue covering most capital outlays (SFC in 2014 was 85% of capex).

We expect the city to slightly scale back its investment programme, adjusting capex to about 18% of total spending in 2015-2017, in line with the economic trend. The city's capex reached RUB100bn, or 22% of total spending in 2014 (2012-2013: 24%), covering investment demands for infrastructure.

Fitch expects the city's debt to remain low according to international standards in 2015-2017, representing 4%-7% of current revenue (2014: 3.6%). St. Petersburg's debt stock currently comprises domestic bonds and budget loans. Exposure to refinancing risk is low; with 2015 maturities limited to RUB7.8bn and fully covered by a small portion of cash reserves (RUB75.7bn as of 1 October 2015). The city's contingent liabilities increased immaterially to RUB17.8bn by end-2014 (2012-2013: RUB16bn). In Fitch's view, a significant increase in the city's indirect risk in the medium term is unlikely.

Fitch projects St. Petersburg's cash reserves will remain strong at RUB22bn-RUB24bn in 2015-2017. The city was net cash positive in 2014 with cash and deposits totalling RUB30bn (2014: RUB50bn). St. Petersburg is running a developed cash management system and its interest revenue increased to RUB4.5bn in 2014 against RUB3.3bn a year earlier.

The city's administration expects the local economy to contract by 1% yoy in 2015 and return to growth of about 1%-3% in 2016-2017. St. Petersburg's gross regional product increased by 1.7% yoy in 2014 (2013: 1.8%), above the national 0.6% growth in 2014. St. Petersburg is Russia's second-largest city and its sound economic profile benefits from its location, concentrated population, federal status and diversified economy. This in turn supports sound wealth indicators.

RATING SENSITIVITIES
The city's ratings are capped by Russia's ratings. A downgrade is unlikely due to the intrinsic strength of the issuer, unless the sovereign is downgraded. However, a sustained deterioration from our baseline scenario would be negative for the ratings.