OREANDA-NEWS. November 30, 2015. Fitch Ratings has affirmed the City of Moscow's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-' with Negative Outlooks, Short-term foreign currency IDR at 'F3' and National Long-term rating at 'AAA(rus)' with a Stable Outlook. Moscow's outstanding senior unsecured debt has also been affirmed at 'BBB-' and 'AAA(rus)'.

The affirmation reflects Moscow's robust wealth and economic indicators, sound budgetary performance, high capex flexibility and strong debt ratios. Moscow's ratings are constrained by Russia's ratings (BBB-/Negative). The Negative Outlook reflects that on the sovereign.

KEY RATING DRIVERS
The 'BBB-' rating reflects Fitch expectation that Moscow will continue to record a strong operating margin of 22%-24% in 2015-2017, close to the 22.2% reported in 2014. Moscow has maintained a high self-financing capacity, with 81.6% of capital expenditure in 2014 covered by its current balance, reflecting the city's capacity to absorb shocks.

Moscow benefits from its status as the Russian capital and the country's economic and financial centre. It has a strong, service-oriented economy and contributed 21.5% of Russia's GRP in 2013. Per capita gross city product was almost 2.5x the national average in 2013, making the city one of the wealthiest subnationalsin the country.

The city's strong intrinsic credit profile remains constrained by the weak institutional framework for local and regional governments (LRGs) in Russia. Frequent reallocation of revenue and expenditure responsibilities between the tiers of government hampers the city's forecasting ability.

Moscow receives significant tax proceeds from major national businesses headquartered in the city. Taxes represented 90% of the city's 2014 operating revenue, driven by corporate and personal income taxes that comprised 84% of tax proceeds. The large proportion of direct taxes in its budget renders the city vulnerable to economic shocks. In addition, new national tax regulation on corporate income tax paid by large consolidated taxpayers has negatively affected the city's budget, causing operating revenue growth to slow to an average 4% yoy in 2012-2014, below the average growth of 16% yoy during 2010-2011.

Moscow's direct risk is low by both national and international standards. It amounted to RUB160.6bn at end-2014 or 10% of current revenue and has a long maturity profile up to 2022. Given the strong current balance and high cash balance (RUB147bn as of 1 January 2015), Moscow relied on its own resources for the repayment of a RUB24.7bn bond in June and November 2015. As of 1 November direct risk was lower at RUB141.8bn and Fitch projects further reduction to RUB134bn by end-2015.

Moscow is exposed to unhedged FX risk as it has EUR407m (equivalent to RUB28.4bn at 25 November 2015) outstanding eurobonds due in October 2016. Together with RUB38bn domestic bonds due in 2016, this will lead to concentration of refinancing needs next year. Fitch expects that Moscow will borrow RUB40bn in the domestic market to refinance maturing liabilities and repay the remaining maturities with its accumulated cash balance.

The city directly and indirectly controls a large number of public-sector companies. This puts pressure on budget expenditure via administrative expenses and subsidies. Fitch does not consider risk from the sector to be significant, due to the large size of the city's budget. The administration is making a significant and, so far, successful effort to reduce the number of public companies by having privatised several large shareholdings in 2013-2014.

RATING SENSITIVITIES
A downgrade is unlikely due to the city's intrinsic strength, unless the sovereign is downgraded. However, a consistent material deterioration of the city's budgetary performance and debt metrics would be negative for the city's ratings.

The ratings would be positively affected by a revision of the sovereign Outlook to Stable from Negative, subject to the city's debt and debt coverage ratios remaining healthy.