OREANDA-NEWS. Corporate And Government Ratings: Methodology And Assumptions," published Nov. 19, 2013, on RatingsDirect and "Methodology: Rating Non-U. S. Local And Regional GovernmentsHigher Than The Sovereign," published Dec. 15, 2014).

In our view Minsk, like other Belarusian LRGs, lacks the financial autonomy toresist significant sovereign interventions, given its high dependence on taxesshared with the sovereign. The central government also imposes spending mandates that local governments cannot refuse to finance. In addition, since 2014, Minsk has been obliged to contribute about 20%-30% of its revenues to the central government budget for equalization purposes.

We have revised our assessment of Minsk's stand-alone credit profile (SACP) to'b+' from 'bb-' due to the persistent weakness of the Belarusian banking system and its therefore uncertain access to external liquidity. The SACP is not a credit rating. Instead, it is a measure of an LRG's intrinsic creditworthiness, were the rating not constrained by the rating on the sovereign. The SACP results from the combination of our assessment of an LRG'sindividual credit profile and the institutional framework in which it operates(see "Methodology For Rating Non-U. S. Local And Regional Governments," published June 30, 2014).

Our view of Minsk's SACP reflects our assessment of Belarus' very volatile andunderfunded institutional framework for LRGs, which underpins the city's very weak budgetary flexibility, its weak economy by international standards, weak management, and high contingent liabilities. Factors supporting the rating arethe city's very low debt burden, adequate liquidity, and average budgetary performance.

The institutional framework under which Belarusian regional governments operate limits Minsk's budgetary flexibility. The central government defines the rate and basis of most taxes, thus constraining the city's ability to modify revenues. It also sets norms for regional spending through centrally set social standards, limits regions' budget deficits, and authorizes all borrowing. Furthermore, the central government can negatively interfere in LRGs' public finances, and the LRGs cannot oppose such decisions.

According to our criteria, we view Minsk's management quality as weak comparedwith the international average, but similar to the quality in most LRGs in theCommonwealth of Independent States. Systemic constraints make the city's annual and long-term budget planning only modestly reliable, and also weaken its revenue, expenditure, and management of government-related entities (GRE).

As Belarus' largest administrative, financial, and commercial center, Minsk iswealthier and more diversified than other Belarusian regions. We expect this will continue to support its budgetary performance. Although the city's wealthlevels are modest by international standards, Minsk's GDP per capita exceeds the national average by 1.2x.

We assess Minsk's budgetary performance as average. Despite the city's very strong financial indicators, they display a pronounced volatility and are subject to risks from significant underspending accumulated over years under the central government's requirement for zero budgetary deficits. In our experience, central government interference leads to significant volatility inthe city's operating balances. In our base-case scenario, we factor in some revenue slowdown and the compulsory contribution to the central budget in 2016-2018, which was increased by another Belarusian ruble (BYR) 4.7 trillion($240 million) this year and now makes up around 30% of the city's revenues. We therefore anticipate a sizable drop in operating margins to 19% of operating revenues in 2016-2018 from an exceptionally strong average of 37%in 2013-2015.

Minsk aims to maintain high capital spending, both directly and via municipal companies. It has committed to an ambitious housing construction program and investment in health care and transport infrastructure. At the same time, we anticipate that Minsk will reduce the amount of capital spending in the current forecast period (2016-2018), owing to pressure triggered by the additional contribution to the central government budget.

Minsk has consistently reported surpluses after capital accounts because of the national fiscal consolidation rules that banned LRGs from having budget deficits in 2011-2014. Although the rule was recently lifted, the city posted a surplus in 2015. We expect a very modest deficit after capital accounts in 2016-2018, stemming in particular from infrastructure needs that were underfunded in previous years and the increased reverse transfer.

Owing to its no-deficit policy implemented over the past few years, Minsk has accumulated ample cash reserves. We therefore anticipate that the city will likely avoid borrowing in the forecast period. This will keep tax-supported debt very low by international standards, at around 18% of operating revenues until 2018. We include Minsk's guarantees in our calculations of direct debt, as the city is responsible for the principal payments on them. The guarantees account for 75% of the city's direct debt, half of which are denominated in foreign currency. However, this is counterbalanced by exceptionally high operating balances that cover Minsk's direct debt severalfold.

We regard Minsk's contingent liabilities as high: Minsk owns or has a stake inmore than 150 GREs. Most of the city's utilities and transport enterprises operate under artificially low tariffs and depend on timely and adequate compensation from the city's budget. We estimate that the potential support tothe GRE sector in the event of stress might reach between 15% and 30% of Minsk's operating revenues.

LIQUIDITY

We revised our assessment of Minsk's liquidity position to adequate from strong due to continiously weakening banking system in Belarus. Our assessmentis now based on Minsk's exceptional debt service coverage ratio and the city'suncertain access to external liquidity.

We expect that Minsk's net average cash will cover debt service falling due within the next 12 months by more than 160%. Alongside direct debt repayments, we include in Minsk's debt service the redemption of city-guaranteed bank loans of municipal companies.

We conservatively apply a 50% haircut to Minsk's cash reserves, as the city places them on deposit in domestic banks that carry short-term ratings lower than 'A-3'. Even using this lower figure, however, we still anticipate that the city's average cash position will comfortably cover its debt service in 2016-2018.

We view Minsk's access to external liquidity as uncertain, given our current placement of Belarus' banking system in group '10' of our Banking Industry Country Risk Assessment, where '1' indicates the lowest risk and '10' the highest (see "Banking Industry Country Risk Assessment: Belarus," published onMarch 1, 2016).

OUTLOOK

The stable outlook on Minsk is aligned with the outlook on Belarus. We would revise our outlook on Minsk to negative, all else being equal, if we revised the outlook on Belarus to negative.

Apart from a sovereign downgrade, and in accordance with our criteria, we would lower our rating on Minsk if the SACP deteriorated to below 'b-'.

However, given that the SACP is at 'b+', we currently do not anticipate that the SACP is likely to weaken below 'b-' under realistic scenarios.

We could raise the rating on Minsk within the next 12 months if we were to raise the ratings on Belarus and if the city continues to perform in line withour base-case scenario.