OREANDA-NEWS. January 26, 2016. Fitch Ratings has downgraded the Russian City of Nizhniy Novgorod's Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'BB-' from 'BB' and its National Long-term rating to 'A+(rus)' from 'AA-(rus)', while affirming its Short-term foreign currency IDR at 'B'. The Outlooks for all Long-term ratings are Stable.

The downgrade reflects weak fiscal performance during 2014-2015 leading to a consistently negative current balance, and increasing short-term debt, which has caused higher refinancing pressure.

KEY RATING DRIVERS
The downgrade reflects the following rating drivers and their relative weights:

High
Fitch expects the city's current balance to remain negative over the medium-term, weighed down by growing debt and higher interest rates on the domestic capital market. At the same time Fitch is projecting a modest recovery in the operating margin to 2%-3% in 2015-2017, after a close to zero margin during 2014-2015. This is based on our expectation that the administration will maintain operating expenditure growth at close to zero, as was the case in 2015.

The city's budgetary performance deteriorated materially in 2014-2015, when the operating margin dropped to close to zero from a sound average 6.6% during 2011-2013. This was caused by lower-than-expected tax collection amid a difficult economic environment in Russia.

The short-term maturity profile of Nizhniy Novgorod's debt is a risk, as the city will have to repay almost its entire debt stock, i.e. RUB7.9bn of bank loans (38% of projected full-year current revenue) by end-2016. Additionally the city will have to borrow about RUB1.1bn for deficit financing. To meet this obligation, the city has two unused revolving bank credit lines totalling RUB1.8bn with one-year maturity and bearing a 14% annual interest rate. Fitch expects the city to be able to roll over its maturing bank loans, although the short-term tenor of its loans means that it will continue to face refinancing risk.

Fitch expects direct risk will grow to RUB9.3bn by end-2016 from RUB8.2bn in 2015. We project a deficit averaging 5.5% of total revenue for 2016-2018 (2015: -6%). Despite growth, direct debt remains moderate and should be below 55% of current revenue by end-2018; however, the short-term nature of its debt leads to increasing refinancing pressure.

Medium
With a population of 1.3 million, the city is the capital of Nizhniy Novgorod region (BB/Negative/B), one of the top 15 Russian regions by gross regional product, providing an industrialised and diversified tax base. The city receives negligible general-purpose financial aid from the region as its budget capacity is higher than the average municipality in the region.

Fitch forecasts marginal 0.5% growth of national GDP in 2016, and believes the city will also face sluggish economic activity, which places a strain on the city's budgetary performance.

Nizhniy Novgorod's ratings also reflect the following key rating drivers:

Nizhniy Novgorod's credit profile remains constrained by weak institutional framework for local and regional governments (LRGs) in Russia. Russia's institutional framework for LRGs has a shorter record of stable development than many of its international peers. The predictability of Russian LRGs' budgetary policy is hampered by frequent reallocation of revenue and expenditure responsibilities between tiers of government.

RATING SENSITIVITIES
A downgrade may result from further increase of the city's direct risk, driven by short-term financing, above 60% of current revenue, coupled with weak budgetary performance with a continuing negative current balance.

An upgrade may result from direct debt stabilisation at below 50% of current revenue coupled with a lengthening of the debt maturity profile and improvement of budgetary performance with a positive current balance on a sustained basis.