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Moody's downgrades Oblast of Saratov to Ba3; outlook negative

April 16, 2012 | Moody's Investors Service

London, 13 April 2012 -- Moody's Investors Service has today downgraded the global-scale foreign and local-currency ratings of Saratov Oblast to
Ba3 from Ba2. The outlook is negative.

RATINGS RATIONALE

The downgrade of Saratov's ratings reflects the region's consistently weak operating and financing balances, its progressively mounting debt burden and low liquidity position. "Saratov's gross operating margins have remained negative over the last three years and this trend is expected to continue at least into 2012. Declining margins have been driven by rapidly growing social obligations, which are not being matched by own-source revenue. At the same time, its financing deficits have been persistently high, rising to as much as 12.7% of total revenues in 2011 and 15.0% in 2010," says Alexander Proklov, a Moody's Vice President-Senior Analyst and lead analyst for Saratov Oblast.

Moody's notes that the regional government failed to introduce fiscal consolidation measures in 2011 despite initially indicating its intention to contain financing deficits and to avoid further debt growth. In 2011, net direct and indirect debt accumulated by the region had risen to a high 54.6% of operating revenue from 21.7% in 2008. According to the region's budget for 2012, the debt burden may exceed 60% of operating revenue. "As Saratov's liquidity position remains low and insufficient to cover any short-term refinancing needs, the region will have to rely on short to medium-term bank loans, the affordability of which may be challenged by weakness in the Russian banking sector at a time of global economic uncertainty. Moreover, a forthcoming decline in the federal government's low-cost soft lending, which was an important funding source in the recent past, will lead to growing market borrowing and may exacerbate refinancing risks in the medium term," adds Mr Proklov.

These pressures are partially offset by some flexibility in Saratov's maturity profile, with most market borrowing to be repaid in 2013 and 2014. Therefore, the recently changed regional government has some room for manoeuvre to implement austerity measures in order to develop a more sustainable fiscal policy. Moody's believes that the region also has some potential to curtail discretionary operating expenditure, although this may be a politically sensitive matter and has yet to be tested.

Saratov benefits from a diversified regional economy which helped the region to withstand economic cyclicality during the recent financial crisis. "Going forward, we expect that economic expansion will become increasingly important to counterbalance any potential increase in expenditures or reduction in federal transfers," adds Mr Proklov.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Moody's negative outlook reflects current uncertainty around Saratov's short to medium-term fiscal policy due to recent changes in the regional governor's office and ongoing changes in the regional government. Moody's notes that the region's risk-absorption capacity has visibly decreased over the last few years, narrowing its future fiscal flexibility.
Therefore, further deterioration in net direct and indirect debt indicators, in conjunction with financing deficits anticipated onward, may lead to a downgrade.

Stabilisation of the outlook may stem from a recovery in operating margins toward positive levels, which may ensure a strengthening in its self-financing capacity. Upward rating pressure may occur in case of a significant decline in Saratov's debt burden and balanced accounts.

Saratov Oblast is located 860 kilometres south-east of Moscow and borders Kazakhstan. It has considerable resource potential in hydrocarbons, construction materials, oil shale and others. Saratov's key industries are machine building, mineral fertilisers and agri-food, which has long been a key sector for the oblast.

The methodologies used in this rating were Regional and Local Governments Outside the US published in May 2008, and The Application of Joint-Default Analysis to Regional and Local Governments published in December 2008. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Company: Saratov region

Full company nameSaratov region Ministry of Finance
Country of riskRussia
Country of registrationRussia

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