MOSCOW (Standard & Poor's) Dec. 17, 2008--Standard & Poor's Ratings Services said today it revised its outlook on Balashikha City District, located in Moscow Oblast in the Russian Federation, to negative from stable. At the same time, the Russia national scale rating was lowered to 'ruA-' from 'ruA'. The 'B' long-term issuer rating was affirmed.
"The outlook revision reflects the city district's weaker economic prospects and, consequently, our expectation of weaker budget revenue growth and continued expenditure pressures, which mainly stem from the decisions of higher layers of government," said Standard & Poor's credit analyst Karen Vartapetov.
The ratings reflect the city district's high dependence on decisions made by the Moscow Oblast (B-/Watch Neg/--) and the sovereign. This results in low revenue and expenditure flexibility and continuing exposure to short-term budget loans, while liquidity remains a weakness of the district. The ratings also incorporate our concerns regarding the strength of management's commitment to prioritizing debt service against other expenditure, when faced with increased budgetary pressures, and the need to support municipal companies. These constraints are, however, mitigated by Balashikha's strategic location near Russia's capital, its low debt, and good budgetary performance until 2007.
Balashikha's financial dependence on Moscow Oblast is of particular concern when combined with its weak liquidity and the Oblast's own financial difficulties, which could potentially lead to additional expenditure responsibilities being handed down to the district, without adequate compensation from the regional level. These risks will be exacerbated if the district is unable to keep its commitment to service debt obligations under budgetary pressure.
Transfers from the oblast are likely to drop to 25% of Balashikha's revenues in 2008-2009, from 40% in 2007. Conversely, the city district's share of modifiable revenues is expected to decrease to 30% in 2009-2010 from about 40% in 2008, due to expected weaker revenues from residential housing construction projects.
"The outlook is negative because we expect a slowdown of Balashikha's economy, which will undermine budget revenue growth in 2009-2010 and, coupled with expenditure pressures, might result in weaker budgetary performance," said Mr. Vartapetov. "It also reflects our concerns regarding the future of the city district's interbudgetary relationship with Moscow Oblast and the likelihood that its liquidity position will remain weak throughout 2009."
A revision of the outlook to stable will depend on the recovery of economic and revenue growth, both in Balashikha and Moscow Oblast. Balashikha's ability to adopt a more prudent approach to debt policies, with longer maturities, to demonstrate a sustainably stronger liquidity position, and to achieve operating surpluses of about 10% in 2009-2010, could also support the ratings.
Alternatively, the ratings could come under pressure if the city district suffers from weaker-than-expected financial performance, with operating balances close to zero, or undertakes riskier policies with higher exposure to short-term debt. |
