OREANDA-NEWS. Fitch Ratings has affirmed Russian Stavropol Region's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB' and National Long-Term rating at 'AA-(rus)' with Stable Outlooks. The Short-Term Foreign Currency IDR has been affirmed at 'B'.

The region's outstanding senior unsecured domestic bonds have also been affirmed at 'BB' and 'AA-(rus)'.

The affirmation reflects Fitch's unchanged base case scenario of Stavropol region's growing direct risk and persistent budget deficit being balanced against a satisfactory operating performance.

KEY RATING DRIVERS
The ratings reflect Stavropol's sustainable operating performance, persistent budget deficit, driven by capex, and moderate, albeit growing, direct risk. The ratings also factor in the region's modest economic indicators, a weak institutional framework for Russian sub-nationals and a recessionary national economy.

Fitch projects the region's operating balance to consolidate at 6%-8% of operating revenue in 2016-2018, slightly up from 5% in 2015, driven by a moderate recovery of operating revenue. Stavropol's operating revenue declined 0.8% in 2015, due to large tax return claims on the region's budget from local corporates. We do not expect this to continue over the medium term and project annual 5%-6% tax growth in 2016-2018.

Fitch forecasts direct risk to grow steadily towards 65% of current revenue by end-2018, from 49% in 2015, due to the region's budget deficit continuing over the medium term. We project deficit before debt variation at 8%-10% of total revenue (2015: 12%) as the region follows an investment-intensive budget (mostly in social infrastructure), including maintenance capex at 17% of total expenditure (2015: 19%), above the 'BB' median of 14%.

We expect Stavropol to continue to benefit from low-cost federal government loans. In 2015, Stavropol contracted RUB6.2bn federal budget loans and will take on an additional RUB5.1bn such loans in 2016. This will increase the share of federal budget loans to 33% by end-2016 from 18% in 2014. Fitch views the improved debt structure as a supportive rating factor given high interest rate volatility in the Russian debt capital market. We expect the region will maintain low interest payments at 2% of operating revenue over the medium term (2015: 2%).

As with most Russian sub-nationals, Stavropol is exposed to high refinancing risk that makes it dependent on access to financial markets. About 70% of the region's direct risk is due in 2016-2017. Stavropol faces a repayment of RUB11.5bn maturities by end-2016. Fitch expects the region to cover its immediate refinancing needs with its undrawn RUB8.3bn credit lines and a RUB5.1bn federal budget loan. We also expect the region to have reasonable access to domestic debt capital markets, with little problem in refinancing maturing debt over the medium term.

Russia's institutional framework for sub-nationals is a constraining factor on the region's ratings. Frequent changes in both the allocation of revenue sources and the assignment of expenditure responsibilities between the tiers of government limit Stavropol's forecasting ability and negatively affect the region's strategic planning, and debt and investment management

The region's administration projects the local economy to return to 3%-4% annual growth in 2016-2018, although this could be weighed down by an expected 1.5% decline in national GDP in 2016. Stavropol's economy is less dependent than the wider Russian economy on the external environment, which can prove volatile. In 2015, the region's gross regional product (GRP) declined 1.2% (2014: up 4.3%), based on preliminary estimates, while the broader Russian economy contracted 3.7%.

Stavropol's socio-economic profile is historically weaker than that of the average Russian region and is dominated by agriculture, food processing and chemistry. Its GRP per capita was 67% of the national median in 2014.

RATING SENSITIVITIES
A sound operating balance at above 10% of operating revenue and debt coverage (2015: 17.4 years) in line with the average maturity profile (2015: 2.3 years) on a sustained basis would lead to an upgrade.

Weakening of the current balance towards negligible levels on a sustained basis, coupled with an increase in direct risk above 60% of current revenue, would lead to a downgrade.