Standard & Poor's Rating Services said today it revised its outlook on the Russian Kaluga Oblast to negative from stable. The 'B+' long-term foreign currency issuer credit rating was affirmed. At the same time, the Russia national scale rating on the Oblast was lowered to 'ruA' from 'ruA+'.
"The rating actions reflect our concern that Kaluga Oblast's budget is coming under increasing pressure from growing social spending," said Standard & Poor's credit analyst Elena Ershova. "This pressure has already resulted in a reduction of the operating margin and may lead to further deterioration of the Oblast's financial performance, while other concerns include the lack of operational transparency, management sophistication, and administrative coordination."
The ratings on Kaluga Oblast are constrained its limited financial flexibility and relatively low level of wealth. The ratings are supported by the Oblast's low debt burden, its diversified economy, and its minimal involvement in the economy.
The budgetary performance of Kaluga Oblast deteriorated in 2004 compared with 2001-2003. Its operating balance declined to 9% of operating revenues, from an annual average of 22.3% in 2001-2003, and the deficit after capital expenditures increased to 4.4%, compared with balanced budgets in 2001-2003. Further deterioration of financial performance is expected in 2005, with an operating balance of about 3%-4% and a deficit after capital expenditures of about 9%-11% projected, due to rising expenditure pressure from salary increases and the implementation of social benefits reform.
Furthermore, Kaluga Oblast's financial flexibility and predictability, as in other Russian regions, is limited due to federal control of the rate, type, and share of taxes. This is exacerbated by the Oblast's relatively high dependence on federal subsidies compared with that of many other rated regions in Russia.
The negative outlook reflects Standard & Poor's concern that Kaluga Oblast's growing social spending and upcoming municipal reform may put additional pressure on the Oblast's budget, which could result in further deterioration of its financial performance.
"Should the Oblast demonstrate improvement in management systems and transparency, and its financial position and debt stabilize, the outlook could be revised back to stable," said Ms. Ershova. "If, however, financial deterioration continues, the rating would come under downward pressure."
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