OREANDA-NEWS. Fitch Ratings has affirmed Russian Voronezh Region's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB+' and its Short-term foreign currency IDR at 'B'. The National Long-term rating has been also affirmed at 'AA(rus)'. The Outlooks on the Long-term ratings are Stable.

Voronezh Region's outstanding senior unsecured domestic bonds ratings (ISIN RU000A0JTG34 and RU000A0JU823) were also affirmed at 'BB+' and 'AA(rus)'.

KEY RATING DRIVERS
The rating affirmation reflects Fitch's expectations that Voronezh region's fiscal performance will stabilise with a forecast operating balance at 10% of operating revenue in 2014-2016 that will fully cover interest expenses and principal repayment. The region's deficit before debt variation is likely to narrow to 6% of total revenue in 2014, after a sharp rise to 10.7% in 2013.

Voronezh Region's operating balance deteriorated in 2013 to 8.8% of operating revenue, following a strong 13.8% in 2012. This was attributed to a 9.7% yoy increase in operating expenditure, driven mostly by staff cost, which offset a slower 3.8% growth in operating revenue as current transfers from the federal budget declined. Fitch believes that the federal government's pledge to raise public sector salaries will continue to fuel growth of operating expenditure in the medium term, making a repeat of the strong 2011-2012 performance unlikely.

Fitch expects the region's direct risk to increase to 30% of current revenue in 2014 and to 33% by end-2016, from 28.3% in 2013, to fund its expected budget deficit in the medium term. The region's direct risk is forecast to increase to RUB22.6bn by end-2014 from RUB11.4bn as of 1 January 2013, but remains moderate by international standards.

Fitch expects debt coverage (direct risk/current balance) to remain under four years in 2014-2016, which is in line with the maturity of the region's debt portfolio. Debt coverage deteriorated in 2013 to 3.7 years from a strong coverage of below two years in 2011-2012. However, the region's debt maturity profile is smooth, and there are no refinancing peaks.

The region's cash position remains sound with cash reserves totalling RUB8.8bn as of 1 September 2014 (2013: RUB4.7bn). Fitch expects the region will use part of this liquidity to limit debt growth in 4Q14. However, the cash position should remain strong at RUB3bn at end-2014. In addition to available cash, the region has untapped stand-by credit lines of RUB3.1bn, available on a first-demand basis.

Voronezh economy is robust and diversified, supporting a solid tax base. The region's administration expects GRP to grow 3%-4% in 2014-2016, which remains higher than the national average. The region's economy expanded 5.1% in 2013 (vs. national GDP growth of 1.3%), after the double-digit growth seen in 2011-2012.

RATING SENSITIVITIES
Sound budgetary performance on a sustained basis with an operating margin of 15% and direct risk below 45% of current revenue could lead to an upgrade.

Deterioration of the operating margin to below 5% for two consecutive years, leading to a significantly weakened debt coverage ratio far above the average maturity of the region's debt portfolio could lead to a downgrade.