OREANDA-NEWS. Fitch Ratings has affirmed Ukrainian Odessa Region's Long-term foreign currency Issuer Default Ratings (IDRs) at 'CCC' and Short-term foreign currency IDR at 'C'. Fitch has also affirmed the region's Long-term local currency IDR at 'B-' and National Long-term rating at 'AA-(ukr)'. The Outlooks on the Long-term local currency IDR and National Long-term rating are Negative.

KEY RATING DRIVERS
The region's ratings are constrained by the ratings of Ukraine (CCC/B-/Negative). Political risk in Ukraine remains high and the transition of power has a range of potential outcomes, complicating any firm judgments. Fitch assesses the institutional framework governing Ukrainian regions as weak. It lacks clarity and sophistication, hindering long-term development and budget planning of the subnationals. In Fitch's view, the political crisis in Ukraine has escalated since the last review of the Odessa region, leading to further deterioration of the Ukraine's institutional framework.

Odessa is free of direct debt and guarantees. Ukrainian law prevents regional governments from borrowing or issuing guarantees, limiting their financing ability. Fitch considers that regional public companies' liabilities do not represent a material risk on the region's budget given the legal context, although no individual data on these entities has been provided. Fitch notes that possible changes in the institutional framework for Ukrainian subnationals after the national presidential election in May 2014 could lead to a deterioration of the region's debt position.

Fitch expects Odessa region's operating balance will remain close to its 2013 level in the medium term although the current political instability in Ukraine complicates any conceptual forecasting. In 2013 the operating balance remained adequate despite deteriorating to 6.4% of operating revenue (2012: 11.9%) due to the deceleration of revenue base growth. The region recorded minor surpluses on its total budget as it cannot contract any debt to finance the deficit.

As Ukraine's largest region by territory, Odessa hosts eight sea and river ports and its economy is well-diversified across several sectors. A significant share of the region's economy relies on trade, agriculture and other services sectors not properly captured by the national statistics. This is partly attributable to the region's per capita wealth indicators being slightly behind the national average level.

RATING SENSITIVITIES
Any downgrade of Ukraine would lead to a downgrade of the region's IDRs. A downgrade could also result from materialisation of any unfavourable changes in the institutional framework for Ukrainian subnationals that would lead to weaker budgetary performance and to a significant deterioration in the region's debt position.

Conversely, a sovereign upgrade could lead to an upgrade of the region's ratings, provided the region maintains a stable operating performance and direct risk does not significantly increase.