OREANDA-NEWS. Fitch Ratings has revised Russian Kirov Region's Outlook to Stable from Negative and affirmed the region's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB-', National Long-Term Rating at 'A+(rus)' and Short-Term Foreign Currency IDR at 'B'.

The Outlook revision reflects the recovery of Kirov Region's operating performance accompanied by an improved debt structure, leading to reduced refinancing pressure.

KEY RATING DRIVERS

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

HIGH

Kirov Region improved its operating balance to 2.7% of operating revenue in 2015, from 0.6% in 2014 and a negative 3.2% in 2013. This was driven by strict control on operating expenditure, which remained almost unchanged in 2015, and growth of operating revenue supported by increased tax proceeds. Tax revenue increased 15%, due to higher corporate income tax (CIT), which offset a moderate decline in current transfers and other operating revenue. Fitch expects CIT to fall back in 2016 and projects 2%-4% annual tax revenue growth in 2016-2018.

Fitch forecasts an operating margin of 2%-3%, which will be sufficient to cover interest payments over the medium term. In 2015, Kirov's current balance returned to positive territory after three years of being in deficit, due to stronger operating performance and reduced interest payments. Interest payments declined to RUB0.8bn in 2015 from RUB1.2bn in 2014 as the region increased the proportion of low-cost budget loans in its debt portfolio.

In 2015, Kirov contracted RUB10bn three-year budget loans to refinance its short-term bank loans. This improved its debt structure by increasing the share of subsidised funding to 70% of direct risk at end-2015 (2014: 34%), and by shifting about 40% of the region's refinancing needs to 2018. As of 1 June 2016, the region's direct risk composed RUB7.5bn bank loans and RUB18.8bn budget loans; only 26% of direct risk is due in 2016. Kirov has RUB5.4bn undrawn credit lines, RUB1.4bn in cash balance and also expects to contract an additional budget loan by end of the year, all of which will fully cover its refinancing needs for 2016.

Fitch projects Kirov's direct debt to remain moderate at below 40% of current revenue (2015: 18%) and direct risk to reach 70% by end-2018 (2015: 59%) due to expected budget deficit. We forecast the region's budget deficit to further narrow to 5%-7% of total revenue over the medium term, from 7.7% in 2015 and an average 11% in 2012-2014, driven by requirements imposed by the Ministry of Finance as a condition for granting budget loans to the region. We expect Kirov to follow a strict cost control policy as its expenditure flexibility remains limited.

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

Kirov's economic profile is weaker than the average Russian region. Gross regional product (GRP) per capita was 66% of the national median in 2014. The economy is diversified. The top 10 taxpayers contributed less than 20% of the region's tax revenue in 2014. The major taxpayers are spread across various sectors of the economy, which makes the region's tax proceeds less vulnerable to the economic cycle. Based on the region's preliminary estimates GRP contracted 4% in 2015 (2014: grew 2.2%), in line with the national economic trend. The regional administration expects the local economy to stagnate or grow only 1% per annum in 2016-2018.

Russia's institutional framework for sub-nationals is a constraint on the region's ratings. Frequent changes in the allocation of revenue sources and in the assignment of expenditure responsibilities between the tiers of government hamper the forecasting ability of local and regional governments in Russia.

RATING SENSITIVITIES

An improvement in the operating margin towards 10%, coupled with a debt payback ratio (direct risk to current balance) of around 10 years on a sustained basis, could lead to an upgrade.

The inability to maintain a positive operating margin on a sustained basis or an increase in direct risk above 80% of current revenue could lead to a downgrade.