OREANDA-NEWS. Fitch Ratings has affirmed Russian Stavropol Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB' and its 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 rating affirmation reflects Fitch's expectations that the region will maintain moderate direct risk and an operating balance at 8% of operating revenue per annum in 2014-2016. The ratings also factor in a persistent budget deficit, due to increasing pressure from operating and capital expenditure, refinancing pressure and the region's below-national average wealth and economic indicators.

Fitch expects the region's direct risk will remain below 45% of current revenue during 2014-2016 despite the budget deficit. The agency expects the region will use part of its RUB4.2bn (as of 1 March 2014) cash to cover its budget deficit, therefore limiting debt growth. Fitch expects direct risk will increase by 20% in 2014 to RUB24.4bn (2013: RUB20.3bn), equivalent to 34% of current revenue, compared with 29% in 2013.

Stavropol faces refinancing pressure from RUB5.7bn of bank loans and RUB2.3bn of issued bonds maturing in 2014, which corresponded to 43% of direct risk as of 1 March 2014. Due to its persistent budget deficit the region is dependent on access to financial markets for debt refinancing. Stavropol plans to issue RUB4bn of bonds in 2014 to replace some of its short-term bank loans and to fund part of the budget deficit. Fitch expects the region will be able to refinance its debt as it has done in the past.

Fitch expects the operating balance will slightly deteriorate in the medium term. This is due to continuing pressure on operating expenditure following the federal government's decision to raise public sector salaries and to fund other social programmes, and a decline in current transfers after a significant rise of 26% in 2013. High current transfers in 2013 were due to the federal government partially compensating public sector salary increases by providing additional subsidies to the region. This allowed the region to record a sound operating balance at 10% of operating revenue in 2013 after a low 2% in 2012.

Budget deficit is likely to persist at 6-8% of total revenue in 2014-2016. In 2013 the region's deficit slightly widened to 10.6% from 8.6% in 2012. The deficit was driven by continuing high capital expenditure at 23.8% of total expenditure in 2013 (2012: 21.4%). Fitch expects capex to be at 20% in 2014, driven by on-going investments in education and healthcare infrastructure; before easing to 17% in 2015-2016 to limit budget deficit and debt growth.

Stavropol's socio-economic profile is historically weaker than that of the average Russian region and is dominated by agriculture and food processing. Its per capita gross regional product (GRP) was about 63% of the national median in 2012. However, the region's economy is less dependent on the external environment, which can prove volatile. The regional government expects sound regional GDP growth of 3.5% per year between 2014 and 2016.

Sustained sound operating balance at about 10% of operating revenue and debt coverage (2013: 3.6 years) in line with average maturity profile (2013: four years) would lead to an upgrade.

Weakening of the operating margin towards zero, coupled with an increase in direct risk above 50% of current revenue, would lead to a downgrade.