OREANDA-NEWS. Fitch Ratings has affirmed Russian Nizhniy Novgorod Region's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BB', Short-Term Foreign Currency IDR at 'B' and National Long-Term Rating at 'AA-(rus)'. The Outlooks on the Long-Term IDRs and National Long-Term Rating are Negative.

The region's outstanding senior unsecured domestic bonds have been affirmed at Long-term local currency 'BB' and National Long-term 'AA-(rus)'.

The affirmation reflects Fitch's unchanged baseline scenario regarding Nizhniy Novgorod Region's satisfactory budgetary performance. The Negative Outlook reflects growing direct risk accompanied by high refinancing pressure amid deteriorating operating performance.

KEY RATING DRIVERS

The 'BB' ratings reflect the satisfactory budgetary performance of Nizhniy Novgorod Region with a small positive operating balance, but also its ongoing budget deficit leading to debt increase. The ratings further take into account a large and diversified local economy, albeit suffering from a nationwide economic slowdown.

Fitch expects Nizhniy Novgorod Region's operating balance will stabilise at low 5%-6% of operating revenue over the medium-term, down from an average 8.8% in 2011-2015, due to sluggish tax proceeds amid the national economic slowdown. The agency expects a current balance at around 1% per year in 2016-2018, weighed down by growing interest payments. This will place the region's creditworthiness under pressure.

According to Fitch's baseline scenario, the region's direct risk will increase towards 70% of current revenue in 2016-2017 and stabilise at this level due to likely cuts in capex after the commissioning of major projects for Football World Cup 2018. The agency estimates that the region's deficit before debt will narrow to 3%-4% by 2018, from 7.5% in 2015.

In 2015 direct risk grew 12% to RUB73.2bn or 63.5% of current revenue. In June 2016 the region placed RUB10bn seven-year domestic bonds, after placement of RUB12bn five-year bonds in 2015. This shifted the debt structure favourably towards a higher proportion of medium-term debt instruments. As a result, weighted average maturity improved to 3.2 years at end-1H16 from 1.9 years in 2014.

Despite the above-mentioned improvement, the region remains exposed to refinancing pressure over the medium-term as 69% of its direct risk will mature in 2016-2018. As of 1 July 2016 the region's refinancing needs for this year stood at RUB16.4bn (24% of outstanding debt), but this is mitigated by RUB50bn undrawn bank credit facilities. Furthermore in August 2016 the administration contracted a budget loan of RUB6.3bn to refinance market debt.

Nizhniy Novgorod Region has a diversified economy with a fairly well-developed industrialised sector and a broad tax base, supporting wealth metrics that are slightly above the national median. The region is among the top 15 Russian regions in gross regional product (GRP) volume and has a population of 3.3 million people (1.7% of Russia's). GRP stagnated in 2015, albeit better than the wider Russian economy (-3.7%) due to firm performance of the steel sector. Additionally, the region benefits from increased military spending as it hosts the sector's production facilities.

The region's credit profile remains constrained by the weak institutional framework for local and regional governments (LRGs) in Russia. Russia's institutional framework for LRGs has a shorter record of stable development than many international peers. The predictability of Russian LRGs' budgetary policy is hampered by the frequent reallocation of revenue and expenditure responsibilities among government tiers.

RATING SENSITIVITIES

An increase in direct risk to above 70% of current revenue, accompanied by ongoing refinancing pressure or an inability to maintain a sustainable positive current balance, could lead to a downgrade.