OREANDA-NEWS. Fitch Ratings has affirmed Russian Ryazan Region's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'B+' with Stable Outlook, Short-Term Foreign Currency IDR at 'B' and National Long-Term Rating at 'A(rus)' with Stable Outlook.

The region's outstanding senior unsecured domestic bonds have been affirmed at Long-term local currency 'B+' and National Long-term 'A(rus)'.

The affirmation reflects Fitch's view that Ryazan's direct risk will remain high but stable while its fiscal performance will be satisfactory for the current rating in the medium term.

KEY RATING DRIVERS

The 'B+' rating reflects the region's high debt and weak Russia's institutional framework. It also reflects the region's satisfactory fiscal performance amid stable economic prospects.

In its base case scenario Fitch expects Ryazan to record satisfactory fiscal performance over 2016-2018. Over the medium term we expect an operating surplus of 6%-7% of operating revenue, sufficient to cover interest payments. Our forecasts are based on the region's resilient tax base - which should drive a 4%-5% yoy increase of operating revenue in 2016-2018 - and on continued operating spending (opex) restraint.

Ryazan reported an operating margin of 8.6% in 2015 (2014: 6.5%), while its deficit before debt variation narrowed to 2.1% of total revenue from 6% over the same period, underpinned by spending optimisation. We expect the region to post a moderate deficit before debt variation in 2016 onwards at about 5%-7% of total revenue, driven by capex funding requirements. In Fitch's view the region's self-financing capacity should remain satisfactory, with capital revenue and current balance covering about 60% of capex (2011-2015: average 64%). At the same time Fitch expects annual capex to fall to 12% of total expenditure over 2016-2018 average 20% over 2011-2015.

Fitch expects the region's direct risk to increase up to 75%-80% of current revenue in 2016-2018, from average of 70% in 2011-2014. The region's administration managed to contain direct risk at RUB26.8bn at end-2015 (2014: RUB26.9bn), in line with our expectations. By end-1H16 the region repaid some of its bonds and bank loans, replacing them with budget loans from the federal government. As a result its debt stock as of 1 July 2016 was 62% composed of federal budget loans (43% at end-2015), 36% bank loans (50%) and 2% domestic bonds (7%).

Ryazan's debt servicing ratio remains weak, with direct debt servicing exceeding more than 2x the region's operating balance in 2015. Additionally, the region's debt payback period in 2015 was over nine years, which is substantially more than the average maturity of the region's debt portfolio of three years. Ryazan therefore remains exposed to moderate refinancing risk as 45% of its debt maturities are in 2H16-2017.

The region's latest forecast sees the local economy growing 1%-2.5% annually in 2016-2018. According to the administration's preliminary estimates, the local economy contracted 0.9% yoy in real terms in 2015 after expanding 1.7% a year earlier. The region's economy is modest in the national context but is fairly diversified and local producers benefit from the region's close proximity to Moscow, the country's largest market.

Russia's institutional framework for local and regional governments is a constraint on the region's ratings. It has a shorter track record of stable development than many of its international peers. Weak institutions lead to limited predictability of Russian LRGs' budgetary policies, which tend to be shaped by the federal government's constant reallocation of revenue and expenditures within government tiers.

RATING SENSITIVITIES

A positive rating action could result from an improvement of the region's fiscal performance, leading to a smaller budget deficit consistently below 5% of total revenue and an improved direct risk-to-current revenue ratio of less than 70% on a sustained basis.

Increased total indebtedness with net overall risk above 90% of total revenue, accompanied by persistent refinancing pressure and a negative current balance, would lead to a downgrade.