OREANDA-NEWS. Fitch Ratings has affirmed Russian Murmansk Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB-' and National Long-term rating at 'A+(rus)'. The Outlooks are Stable. The region's Short-term foreign currency IDR has been affirmed at 'B'.

The affirmation reflects the recovery of the region's budgetary performance in 2015, with the restoration of a sound operating margin from very weak actuals in 2012-2014. Fitch expects a good budgetary performance in the medium term, with a positive current balance and growing but manageable direct risk.

KEY RATING DRIVERS
The 'BB-' rating reflects the volatile budgetary performance, with a high deficit before debt in 2012-2014 that led to a rapid debt increase albeit from a low base. The rating also reflects a concentrated economy with a developed tax base that is exposed to the economic cycle. The ratings also factor in the weak institutional framework and our expectation of a stagnant local economy following the negative national trend.

Fitch expects Murmansk's operating margin to remain in the range of 7%-9% in 2016-2018, underpinned by stable tax proceeds and control over expenditure. The region has demonstrated a faster tax recovery compared with our previous projections in October 2015. The operating margin soared to 14% in 2015 (2014: negative 1.2%) driven by a 1.5x increase in corporate income tax - one of the region's main revenue sources. Exceptional tax revenue growth was driven by the earnings recovery of the region's major export-oriented taxpayers from metallurgy and mining sectors, which gained from a sharp 2.5x rouble depreciation at end-2014.

Fitch expects the region's deficit before debt variation to remain in the range of 6%-7% in the medium term, reflecting continuous pressure from the expenditure and expectation of some scale back of the tax revenue in 2016. The deficit narrowed to a low 2.4% of total revenue in 2015 from a high 17.9% in 2014. This mostly resulted from a 20.9% increase in tax revenue and the region's strict cost control measures, which resulted in zero growth of total expenditure. Fitch considers the region will increase its operating expenditure moderately in 2016 to adjust budget spending to national inflation (12.9% in 2015).

Fitch expects direct risk to continue growing during 2016-2018. However, Murmansk's debt burden should remain below 60%, which is moderate compared with international peers. Nevertheless, the region's exposure to short-term bank loans could put additional refinancing pressure on the budget.

The region's debt profile remains fairly short term as direct risk is dominated by bank loans with maturity of between one and three years. Bank loans accounted for 75% of direct risk at 1 January 2016, and the remainder were loans from the federal budget. Murmansk needs to repay almost all outstanding debt during 2016-2018 with a moderate concentration in 2017. Fitch assumes the region will roll over maturing budget loans, while maturing bank loans are likely to be refinanced by the same banks or by new loans from the federal budget.

The regional economy has a strong industrial base as Murmansk is home to several natural resource extracting companies. This provides an extensive, but concentrated tax base for the region's budget, with tax revenue representing 84.5% of operating revenue in 2015. However, a large portion of tax revenues depends on companies' profits, resulting in high revenue volatility. Following deteriorated market conditions in 2012-2014, the region recorded a close to zero operating margin, and the deficit before debt variation averaged a high 15.8% of total revenue.

Murmansk demonstrated marginal 0.6% GRP contraction in real terms in 2015, which outpaced the 3.7% contraction of national GDP. The administration forecasts stagnation of the local economy in 2016-2017.

Russia's institutional framework for subnationals is a constraining factor on the region's ratings. Frequent changes in allocation of revenue sources and assignment of expenditure responsibilities between the tiers of government limit the Murmansk's forecasting ability and negatively affect its financial flexibility.

RATING SENSITIVITIES
Sound budgetary performance leading to a debt coverage ratio (direct risk to current balance) below 10 years (2015: 3.6 years) on a sustained basis would lead to an upgrade.