OREANDA-NEWS. Fitch Ratings has revised the Russian City of Samara's Outlook to Positive from Stable. The agency has affirmed the region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB', National Long-term rating at 'AA-(rus)' and its Short-term foreign currency IDR at 'B'.

KEY RATING DRIVERS
The Outlook revision reflects the following rating drivers and their relative weights:
High:
Fitch expects Samara's budgetary performance to stabilise at the current sound level with margins averaging 15% in 2014-2016. A strong operating balance underpins a high self-financing capacity for capex and should lead to a narrowing of the deficit before debt variation to a low 1%-2% of total revenue in 2014, from 5.4% in 2013.

The city's operating balance reached a strong 15.7% of operating revenue in 2013 (2012: 12.5%). This improvement was partly driven by a positive net effect of reallocation of expenditure responsibilities and revenue sources between municipal and regional budgets during 2012 and 2013.

Medium:
Fitch expects the city's direct risk to remain low at 35% of current revenue (RUB6.9bn) by end-2014, slightly up from 32% (RUB6bn) a year earlier. The city intends to limit debt growth and has budgeted close to a zero fiscal balance for 2015-2016. This should lead to the debt stock stabilising at 33% of current revenue by 2016. Contingent risk is low as the city does not have outstanding guarantees and its public sector entities are self-sufficient.

Despite a low debt burden Samara mostly relies on short-term bank loans for deficit financing. The city's direct risk stock as of 1 August 2014 was 77% composed of bank loans with less than one year to maturity. Although the short-term nature of loans, contracted from local banks, exposes the city to refinancing risk, it is mitigated by the city's strong liquidity, including committed lines of credit with local banks. Outstanding cash and committed credit lines amounted to RUB3,375m as of 1 August 2014 and fully cover bank loans due in 2H14.

The city also plans to contract a RUB2bn revolving bank credit line with up to three-year maturity by end-2014. If the placement takes place it would replace part of the city's outstanding one-year bank loans and mitigate refinancing pressure.

Samara's ratings also reflect the following key rating drivers:
The city is the capital of Samara Region, which has a well-developed diversified economy, based on a strong industrial sector. Local companies' sound economic performance supports Samara's strong fiscal capacity, contributing 67% of operating revenue in 2013. Samara receives an insignificant amount of financial aid in the form of general-purpose grants from the region as its budget capacity is higher than that of other municipalities in the region.

The city's self-financing capacity is strong with capital revenue and the current balance on average covering 90% of annual capex in 2013. Samara's capex is high relative to national peers. It accounted for 30% of total spending in 2013 (2012: 27%) as the city continuously funded development projects. Fitch expects the city's capex to gradually decline to 21%-23% of total spending during 2013-2015 following a decline in capital transfers from the regional government.

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

RATING SENSITIVITIES
Narrowing of the deficit before debt variation leading to stabilisation of the overall debt burden at below 40% of current revenue, coupled with the maintenance of sound budgetary performance in line with Fitch's expectations, would be positive for the ratings.