OREANDA-NEWS. Fitch Ratings has affirmed the Russian Chelyabinsk Region's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB-', Short-Term Foreign Currency IDR at 'F3' and National Long-Term rating at 'AA+(rus)'. The Outlooks on the Long-Term IDRs are Negative and the Outlook on the National Long-Term Rating is Stable.

The affirmation reflects Fitch's unchanged baseline scenario regarding Chelyabinsk's satisfactory budgetary performance and strong key credit metrics over the medium term. The Negative Outlook reflects that on the Russian Federation (BBB-/Negative).

KEY RATING DRIVERS

The ratings reflect Chelyabinsk region's low levels of debt and satisfactory current balance, which provide a debt payback ratio close to the region's debt average maturity, and an industrialised economy. The ratings also take into account the region's high contingent liabilities, a weak institutional framework for Russian sub-nationals and the national economic downturn, which negatively impacts the region's tax base.

Fitch forecasts Chelyabinsk region will maintain a satisfactory operating balance at about 6% of operating revenue in 2016-2018. This is below the 2011-2015 average of 9.5% due to expected stagnation in tax revenues amid a slowdown of the local economy and reduction of the positive effect of rouble depreciation on the export-oriented steel sector, which is the largest taxpayer in the region. Despite the 5.8% yoy fall in corporate income tax proceeds from steel companies in 1H16, the administration managed to keep a budgetary surplus owing to expense suspension for 2H16. We estimate the region will record a moderate budget deficit of 3% of total revenue for the full year 2016.

Fitch projects the region's direct risk will increase mildly over the medium term but remain low at around 20% of current revenue (2015: 13.1%). The direct risk payback ratio will remain sound at three to four years in 2016-2018 (2015: 1.7 years), which is close to the region's average debt maturity (3.1 years as of 1 September 2016), indicating structural financial sustainability.

Chelyabinsk's refinancing risk remains low due to historically low debt. As of 1 September 2016, the region's outstanding 2016-2017 maturities totalled RUB9bn (8% of current revenue), which are fully covered by undrawn credit lines.

Fitch expects the region will continue to use guarantees to help local companies amid the economic slowdown and liquidity shortage. As of 1 September 2016, outstanding guarantees stood at a relatively high RUB14.8bn, up from RUB8.8bn at end-2014, as the region issued a RUB8bn guarantee to pipe rolling plant ChelPipe, which is among the leading pipe producers in Russia. Fitch projects gradual amortisation of issued guarantees, and stabilisation of net overall risk at 30%-33% of current revenue by 2018 (2015: 27.6%). So far, no guarantees have been called by lenders.

Chelyabinsk region has a developed industrial economy weighted towards the metallurgical and machine-building sectors. Local wealth metrics are close to the national median. The tax base is slightly concentrated, with the top 10 taxpayers accounting for about 27% of tax revenue in 2015. This exposes the region's revenue to volatility and to economic cycles. Gross regional product fell 5% in 2015, which is worse than the fall in Russia's GDP of 3.7%. According to the region's administration, the local economy may further contract in 2016-2017, before returning to sluggish growth in 2018-2019.

Russia's institutional framework for sub-nationals is a constraining factor on the region's ratings. It has a shorter record of stable development than many of its international peers. The predictability of Russian LRGs' budgetary policy is hampered by frequent reallocation of revenue and expenditure responsibilities within government tiers.

RATING SENSITIVITIES

A downgrade of the sovereign or sharp growth in total indebtedness (including contingent liabilities) to above 50% of current revenue or a weak operating balance at below 5% of operating revenue (2015: 8.4%) on a sustained basis would lead to a downgrade.