OREANDA-NEWS. Fitch Ratings has affirmed Russian Murmansk Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB', with Negative Outlooks, and its Short-term foreign currency IDR at 'B'. The agency has also affirmed the region's National Long-term rating at 'AA-(rus)' with a Negative Outlook.

The Negative Outlook reflects risks stemming from the region's rapidly rising debt, driven by high deficit before debt variation. The affirmation reflects the region's moderate direct risk, a positive operating balance that is still sufficient to cover interest payments, and a strong industrial economy supporting above-national average wealth indicators.

Fitch expects direct risk will continue to grow over the next three years, driven by deficit before debt variation on the back of subdued tax revenue and continuous pressure on operating expenditure. Fitch forecast direct risk will reach 40% of current revenue by end-2014 and 60% in 2016, up from 31% at end-2013. Murmansk's debt burden is still moderate compared with national and international peers, but expected rapid rise in debt in 2014-2016 will cause an increase in both debt servicing and refinancing needs, due to the region's short-term debt profile.

The region's direct risk is dominated by bank loans with maturity between one and three years; Fitch expects bank loans to account for 80% of direct risk by end-2014, and three-year loans from the federal budget for the remainder. Murmansk faces repayment of 93% of its outstanding debt during 4Q14-2016. This, coupled with the weak current balance, results in the region being highly dependent on financial market access for debt refinancing and deficit funding. Fitch expects the region will be able to refinance the maturing debt with the same banks as RUB6.6bn of its credit lines were un-utilised as of 1 October 2014. However higher interest rates for new bank loans will put additional pressure on the budget.

Based on the budget execution during the first nine months of 2014 Fitch expects results for 2014 will be similar to 2013's, Fitch expect the region's operating balance to reach 2.2% of operating revenue in 2014 and be around 2%-3% in 2015-2016, compared with 1.9% in 2013. Fitch forecast deficit before debt variation will reach 13.7% of total revenue in 2014 and remain at 11%-13% in 2015-2016, against 15.2% in 2013.

The region's rigid operating expenditure represents a high 96% of total revenue in 2014, leaving little scope for manoeuvre. Capital outlays lag behind those of 'BB' national peers. Fitch expects the region's capex will average a low 10%-12% of total expenditure in 2014-2016, given the region's intention to control its budget deficit.

The regional economy has a strong industrial base as Murmansk is home to several natural resource development conglomerates. This provides an extensive tax base for the region's budget, with tax revenue representing 81% of operating revenue in 2013. However, a large portion of tax revenues depends on companies' profits, resulting in high revenue volatility. In 2012 and 2013 corporate income tax proceeds fell sharply due to weak earnings at major local taxpayers following price declines for key commodity exports. This led to significant deterioration of the region's budgetary performance, a large deficit and rapid debt increase.

The inability to maintain a sustainable positive current balance or a significant debt increase above Fitch's projections would lead to a downgrade.