OREANDA-NEWS. Fitch Ratings has affirmed Russian Tambov Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB+', with Stable Outlooks, and its Short-term foreign currency IDR at 'B'. The agency has also affirmed the region's National Long-term rating at 'AA(rus)' with a Stable Outlook.

KEY RATING DRIVERS
The affirmation reflects Tambov's solid operating performance and low, albeit increasing, direct risk. The ratings also factor in continuous pressure on operating expenditure, high refinancing needs and the modest size of the economy, which leads to a high dependence on transfers from the federal budget.

Fitch expects Tambov to report stable budgetary performance in 2014-2016 with an operating balance at about 10% of operating revenue. Its operating balance deteriorated in 2013 to 10.4%, from 16.9% a year earlier, but remained sufficient to cover debt servicing needs. The deterioration was due to rising operating expenditure pressure following the federal government's decision to increase public sector salaries.

Fitch estimates Tambov's deficit before debt variation to stabilise at about 6% of total revenue in 2014-2016, due to an expected decline in capex. The region recorded a large 13% deficit before debt variation in 2013 after two years of surpluses. The deficit was driven by increased capex that was, to a large extent, carried forward from the previous year. As about 60% of the deficit was covered by cash accumulated growth of Tambov's direct risk was limited.

Fitch expects the region's direct risk to increase to fund its budget deficit in 2014-2016. Direct risk will reach RUB9.3bn, equivalent to a moderate 28% of current revenue by end-2014 (2013: 25% or RUB7.8bn), and will gradually rise to 35% by end-2016. The region relies mostly on bank loans contracted with Sberbank of Russia (BBB/Negative/bbb) with three-year maturities, which is short-term by international standards.

In 2014 the region faces maturing debt of RUB3.1bn, which corresponded to 42% of direct risk as of 1 March 2014. Fitch expects the region will deplete its liquidity to fund part of its deficit in 2014, increasing refinancing risk. However, refinancing pressure is mitigated, albeit in the near-term, by short term budget loans from the federal government at subsidised interest rates.

Tambov's economy is historically weaker than that of the average Russian region. Wealth indicators remain below the national median despite the region's recent rapid development. This supresses the region's tax base and leads to a high dependence on federal transfers (2013: 51% of operating revenue). Positively, the federal transfers act as a stabilising factor during recessions, making the region less vulnerable to negative external shocks.

RATING SENSITIVITIES
Direct risk stabilisation at about 20% of current revenue, coupled with maintaining a sustainable strong operating balance at about 15% of operating revenue, will lead to an upgrade.

Deterioration in budgetary performance with the operating balance below 10% of operating revenue for two consecutive years, leading to weaker debt coverage than average debt maturity would lead to negative rating action.