OREANDA-NEWS. Fitch Ratings has affirmed Russian Kirov Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB-', with Negative Outlooks, and its Short-term foreign currency IDR at 'B'. The agency has also affirmed the region's National Long-term rating at 'A+(rus)' with a Negative Outlook.

The ratings reflect the region's weak budgetary performance, rising debt, significant refinancing pressure and a weak economic profile. Positively, they reflect the region's still moderate direct risk compared with international peers and its low contingent liabilities.

Fitch expects the region's direct risk to increase in 2014-2016 and to reach 65% of current revenue (2013: 47%). Direct risk is still moderate in an international context, but is fairly high for an emerging-market economy with a lack of access to long-term financing.

Fitch expects the region's debt coverage (direct risk/current balance) to be weak in the medium term due to a negative current balance. Given that at end-2013 the region faced repayment of 85% of its direct risk during the next 12 months, Kirov is highly dependent on access to the market for refinancing maturing debt and capex finance.

Fitch expects the region's debt structure to improve with a lengthening of its maturity profile. In 1H14 Kirov contracted RUB2bn of three-year bank loans to refinance maturing one-year bank loans. The region's administration plans to replace another RUB3.8bn of bank loans with a three-year subsidised budget loan by end-2014. This will shift the region's debt profile towards medium-term liabilities and reduce immediate refinancing risk; the maturity profile will extend till 2017.

Fitch estimates the region's budgetary performance to be weak in the medium term, with an operating balance close to zero and deficit before debt variation of 8-9% of total revenue in 2014-2016. Deficit will be substantially covered by new borrowing due to depletion of accumulated cash reserves, unless Kirov receives additional support from the federal government in the form of transfers or budget loans.

The region's economic profile is weaker than the average Russian region. Gross regional product (GRP) per capita was 66% of the national median in 2012. However, the economy is diversified and major taxpayers are spread across various sectors of the economy, which makes the region's tax proceeds less vulnerable to the economic cycles. The administration forecasts annual economic growth to average 2.1% in 2014-2016.

The ratings are negatively affected by the evolving nature of the institutional framework for local and regional governments (LRGs) in Russia. It has a shorter track record of stable development than many of its international peers. The predictability of Russian LRGs' budgetary policy is constrained by the continuous reallocation of revenue and expenditure responsibilities between the tiers of government.

RATING SENSITIVITIES
The main factors that could, individually or collectively, lead to downgrade are:
- Inability to narrow deficit before debt variation below 5% of total revenue and lengthen the maturity profile of direct risk
- A weak operating balance insufficient to cover interest expense for 2014-2015

Positive rating action is unlikely under the Fitch base case scenario. However, additional support from the federal government or significant improvement of operating performance, coupled with an extension of the debt profile, could lead to the Outlook being changed to Stable.