OREANDA-NEWS. Fitch Ratings has affirmed Russian Republic of Komi's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) 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 republic's outstanding senior unsecured debt ratings have been affirmed at 'BB' and 'AA-(rus)'.

The Negative Outlook reflects Komi's large persistent budget deficits leading to growing debt burden as well as the republic's weakened fiscal capacity with low prospects of its restoration over the medium-term. The continuing negative trend in the local economy will likely to hinder recovery of the fiscal performance.

KEY RATING DRIVERS

The 'BB' rating reflects the region's sound economic fundamentals and moderate but growing debt. This partly offsets the republic's weak operating performance and elevated refinancing pressure due to extensive use of bank loans to service its growing debt.

Fitch projects Komi's operating balance will likely remain negative over the medium term (2015: - 2.6%) due to the rigidity of social-oriented spending and requirements to maintain public sector salaries in line with the fairly high average salary in the region. The deficit before debt variation could account for about 10% of total revenue in 2016-2018, which is below the average 17.8% in 2013-2015, but still material. Fitch assesses the republic's fiscal flexibility as low and its ability to reduce capital spending as limited due to already low capex (below 10% of total expenditure in 2015).

Fitch forecasts direct risk to exceed 70% of current revenue in 2016-2017 (2015: 61%), which would put further pressure on the ratings; and the debt is likely to reach 80% in 2018 driven by the persistent deficit. In 7M16, direct risk further increased to RUB39bn, up from RUB33.1bn at end-2015.

This is mitigated by increased use of low-cost federal budget loans and treasury lines, which amounted to RUB12.8bn, or 33% of the risk (end-2015: 24%) at 1 August 2016. Of this, RUB4.7bn are short-term treasury lines, which the region will have to replace with bank loans by end-2016.

Komi is exposed to high refinancing risk, which stems from the region's high dependence on capital market to service its debt. Direct debt servicing exceeded 20% of current revenue in 2014-2015 while the weighted average maturity of its debt is two years and 10 months, which is relatively short in the international context.

By end-2016, Komi needs to refinance RUB11.4bn, or 30% of its direct risk. The republic is likely to cover its funding needs with bank loans as its cash balance remains very low (2015: RUB218m). At 1 September 2016, the region had RUB11.5bn of undrawn credit lines, available at first demand.

The republic's credit profile remains constrained by the weak institutional framework for Russian local and regional governments (LRGs), which has a shorter record of stable development than many of its international peers. Weak institutions lead to lower predictability of Russian LRGs' budgetary policies, which are subject to the federal government's continuous reallocation of revenue and expenditure responsibilities within government tiers.

Komi has a sound economy and its gross regional product (GRP) per capita was almost twice as high as the national median in 2014 and average salary was about 60% above the national median in December 2015. However, the economy is concentrated in the natural resources sector, which exposes the region to commodity price fluctuations and potential changes in fiscal regulation. The top 10 taxpayers contributed about 50% of the republic's consolidated budget tax revenue in 2015.

Komi's government estimates the republic's GRP to further decrease by 1.7% yoy in 2016 (2015: fall 3.5%) due to contracting oil refining, construction and trade output and might return to marginal growth in 2017-2019. The republic's economy follows the national economic trend, which Fitch forecasts to fall 0.5% in 2016 (2015: 3.7%) and will moderately recover by 1.3%-2.0% yoy in 2017-2018.

RATING SENSITIVITIES

Growth in direct risk to above 70% of current revenue, coupled with negative operating balances on a sustained basis and a reduced capacity to obtain affordable funding for its debt refinancing needs, will lead to a downgrade.