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Fitch Rates Vologda Region 'BB'; Outlook Stable
26.12.2007 15:58
http://www.cbonds.info/eng/news/ December 19, 2007 - Cbonds
Fitch Ratings has today assigned the Russian Vologda region Long-term foreign and local currency 'BB' ratings and a Short-term foreign currency 'B' rating. Fitch also assigned the Vologda region a National Long-term 'AA-(AA minus)(rus)' rating. The Outlooks for the Long-term ratings are Stable.
The ratings reflect the region's strong financial management and low debt burden. However, the ratings also take into consideration the rigidity of the region's budgetary expenditure and unstable budget balances. The Stable Outlooks reflect Fitch's expectation that growth and diversification of the local economy will lead to an increase of the budget revenue, while retaining tight control over operating expenditure, and to consolidation of the budgetary performance.
The region implemented a public finance reform programme and developed a sustainable fiscal policy that allowed accumulation of solid cash reserves safeguarding against the negative revenue shocks. A high level of liquidity (RUB3.2bn on average in 2004-06) cushioned the deterioration of tax receipts in 2005. The debt burden of the region is insignificant (the direct risk of the region accounted for 0.2% of current revenue in 2006), making the region practically debt free. Considerable cash reserves and low debt burden adds sustainability to the region's budget policy in the medium-term.
However, the ratings also factor in a high tax concentration. The regional economy is dominated by the ferrous metallurgy sector with SEVERSTAL's (rated 'BB-' (BB minus)/'B'/Outlook Positive) Cherepovets steel smelting plant being the single largest contributor to the regional budget. Thus, the region's own budget revenue is vulnerable to market conjuncture for steel products. However, the share of tax revenue contributed by the metallurgy sector has been declining since 2003, reaching 37% of the region's revenue in 2006. In an effort to overcome dependence on the ferrous metallurgy sector, the region has recently launched development projects aimed to diversify the local economy and expand the tax base.
In addition, the region's budgetary expenditures remain moderately rigid. The pressure exerted on the regional budget by social expenses has increased since 2005, when the region acquired new responsibilities for financing social security allowances and other social expenditures. The absolute volume of social expenditure grew by 1.9x in 2004 through 2006, while the financial aid provided by the region to municipalities increased by 2.1x.
The Vologda region is located in the north of the European part of Russia and accounts for 1.08% of Russia's GDP in 2005 and 0.9% of the country's total population.
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