Fitch lifts Karelia view to positive

Fitch Ratings said it changed the Russian Republic of Karelia's outlook to positive from stable and affirmed its B+ long-term, B short-term and A(rus) national long-term ratings.

The positive outlook reflects Fitch's expectations of a recovery in the republic's budgetary performance in 2007 due to lower spending needs resulting from increased capital expenditure efficiency and high quality of management. The latter allowed the republic to successfully overcome budgetary pressures stemming from both the social sector and administrative reforms in 2006, the agency said, adding that Karelia was able to compensate for the temporary adverse effect of the decline in enterprise profit in the same year. The operating performance is expected to rebound in 2007, with operating margin seen remaining close to 10%.

At the same time, the regional budget is characterized by a high level of operating expenditure rigidity and was negatively affected by the temporary decline in enterprise profit in 2006, which resulted in a sharp reduction of corporate income tax revenues in the first half of 2006, the agency said.

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