OREANDA-NEWS. Fitch Ratings has affirmed Russian Tambov Region's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB+' with Stable Outlooks and Short-Term Foreign Currency IDR at 'B'. The agency has also affirmed the region's National Long-Term Rating at 'AA(rus)' with a Stable Outlook.

Fitch has also assigned the region's senior unsecured domestic bonds (ISIN RU000A0JWT75) 'BB+' and 'AA(rus)' ratings.

The affirmation reflects Fitch's unchanged base-case scenario regarding the region's stable budgetary performance and moderate direct risk over the medium term.

KEY RATING DRIVERS

The 'BB+' rating reflects the region's moderate debt burden with manageable refinancing risk and satisfactory current balance, which provides a debt payback ratio in line with the average debt maturity. The ratings also factor in the weak institutional framework for Russian sub-nationals and the modest size of Tambov region's economy, resulting in its material reliance on transfers from the federal budget.

Fitch forecasts Tambov will record a good operating balance at about 10% of operating revenue over the medium term supported by the developing local tax base and stable current transfers from the federal government. The region's reliance on transfers has moderately reduced in 2014-2015 due to growing tax revenues, although they contributed a still material 40% of operating revenue (2011-2013: 50%). Fitch expects tax revenue growth to decelerate from a high 21% in 2015 and projects it will be 1%-5% per year in 2016-2018.

Fitch projects Tambov will record a deficit of about 6% of total revenue in 2016-2018 (2015: 7.7%) as the region continues to invest in the local economy and maintains sound capex at above 20% (2010-2015: average 30%) of total expenditure. Tambov's self-financing capacity is likely to remain strong, comfortably covering up to about 75% of capex (2010-2015: average 87%) from the current balance and capital transfers from the federal government. The remaining 25% of capex will be financed with a combination of cash balance and new borrowings that will fuel modest growth of direct risk over the medium term.

Fitch forecasts Tambov's direct risk to remain moderate, close to 50% of current revenue (2015: 33.7%) in 2016-2018. In 8M16, direct risk stabilised at about RUB12bn (end-2015: RUB12.2bn) and low-cost budget loans amounted to about 30% of the outstanding debt. At end-September, Tambov issued RUB1.6bn seven-year bonds, which diversified its debt portfolio and moderately reduced its refinancing risk over the medium term.

Tambov has a smooth debt maturity profile and its refinancing needs are concentrated in 2017-2018, when 80% of direct risk comes due. By end-2016, the region needs to repay RUB1.8bn, which was fully covered by issued bonds and RUB2.3bn cash balance at 1 September 2016. Additional funding may come from RUB2.1bn of undrawn credit lines.

The region'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 continuous reallocation of revenue and expenditure responsibilities within government tiers.

Tambov's economy has been growing, counter to the national one, supported by a growing agricultural sector and processing industries. Tambov's administration estimated that GRP has increased 3.3% yoy in 2015 while Russia's economy contracted by 3.7% (Fitch's estimate). Nevertheless, Tambov's wealth metrics remain modest and its GRP per capita was 11% below the national median in 2014.

RATING SENSITIVITIES

A continuous budget deficit leading to growth of direct risk above 50% of current revenue, accompanied by high refinancing pressure, would lead to negative rating action.

An upgrade is unlikely given the pressure on the sovereign's IDRs (BBB-/Negative). However, direct risk declining towards 20% of current revenue and an operating margin at above 15% on a sustained basis accompanied by a Russian economic recovery, could lead to an upgrade.