OREANDA-NEWS. Fitch Ratings has revised Russian Kursk Region's Outlook to Stable from Negative and affirmed its Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB+', National Long-term rating at 'AA(rus)' and Short-term foreign currency IDR at 'B'.

The Outlook revision reflects the restoration of Kursk region's operating performance accompanied by a material decline in direct debt and reduced refinancing needs over the medium term.

KEY RATING DRIVERS
The Outlook revision reflects the following rating drivers and their relative weights:

HIGH
Kursk region restored its operating balance to 5% of operating revenue in 2015, a return to its 2013 level after a sharp fall to a negative territory in 2014. The improvement was driven by the restoration of current transfers to RUB8.2bn (2014: RUB6.6bn) and strong tax revenue growth of 12%. The tax increase was largely from corporate income tax (+16%) and excises (+33%) following larger income of export-oriented local tax payers and higher production of excisable goods. The restored operating balance and cuts in capex to 13% of total expenditure (2014: 17%) led to a deficit of less than 1% of total revenue from a sizeable 12% in 2014.

Fitch projects Kursk's operating balance will consolidate at about 5% of operating revenue threshold in 2016-2018, and be sufficient to 6x cover interest payments (2015: 8x). However, this will be much lower than the 10% recorded in 2010-2012, leading to reduced financial flexibility and higher vulnerability to any negative changes in revenue or expenditure. We project tax revenue will grow 2%-5% in 2016-2018 in line with the expected economic growth, while cost optimisation measures implemented by the region's administration will restrain operating expenditure.

Fitch expects the region's direct risk to remain around 30% of current revenue over the medium term (2015: 20%) despite its gradual growth due to debt funding of expected deficit of about 5% in 2016-2018. In 2015, Kursk managed to materially reduce its direct debt to a low 4% of current revenue from 18% in 2014 as the region contracted RUB4.6bn low-cost budget loans and refinanced its bank loans. This substantially reduced the region's refinancing risk and Kursk has no direct debt repayments in 2016. The maturities of outstanding budget loans are spread in 2017-2018 and 2025-2034.

Fitch views the improved debt structure and reduced refinancing risk as supportive rating factors given the high interest rate volatility on Russia's debt capital market. We project Kursk will keep interest payments low at less than 1% of operating revenue in 2016-2018.

MEDIUM
During 2011-2015, the region's economic growth outpaced the national average. In 2015, gross regional product (GRP) increased by 1.2% yoy (2014: 4.4%) according to preliminary data while the broader Russian economy contracted by 3.7%. Kursk region's economy is moderately diversified and is not vulnerable to changes in market price on commodities. The local economy growth is supported by growing processing industries, mostly food processing, agricultural sector, rising iron ore mining and energy output.

Kursk's administration believes the growth rate of regional economy in 2016-2018 will vary between 2%-4% annually, supported by an increase in industrial output and developed agricultural sector. Nevertheless, the region's economy remains modest, with GRP per capita 8% lower than the national median in 2014.

The region's ratings also reflect the following key rating drivers:

Russia's institutional framework for local and regional governments (LRGs) is a constraining factor on the region's ratings. 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.

RATING SENSITIVITIES
An upgrade is unlikely due to the persistent pressure on the sovereign ratings (BBB-/Negative). However, restoration of the operating balance to its historically high level of around 15% of operating revenue, coupled with debt payback (2015: 4.7 years) aligned with the average maturity profile of the region's debt (2015: 4 years), would lead to an upgrade.

Growth of short-term debt leading to high refinancing pressure, accompanied by sharp deterioration of operating balance consistently below expected level of about 5% of operating revenue, would lead to a downgrade.