OREANDA-NEWS. Fitch Ratings has revised Smolensk Region's Outlook to Stable from Negative and affirmed the region's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'B+', National Long-term rating at 'A-(rus)' and Short-term foreign currency IDR at 'B'. Smolensk's outstanding senior unsecured domestic bonds have also been affirmed at 'B+' and 'A-(rus)'.

KEY RATING DRIVERS
The Outlook revision reflects the following rating drivers and their relative weights:
High:
Smolensk region has managed to reduce refinancing pressure in 2014. It only has to repay RUB100m of a budget loan in 2014 and RUB2.8bn of debt maturing in 2015. This amounted to 15.5% of the region's direct risk as of 1 July 2014. The region continues to rely on three-year revolving lines of credit after it improved its debt profile in 2013 by refinancing short-term bank loans with a five-year bond, three-year bank loans and three-year budget loans. Thus, most of the region's direct risk matures between 2014 and 2018. A small amount of federal budget loans (RUB223m) should be repaid between 2023 and 2032.

Fitch expects the region's direct risk will stabilise at below 80% of current revenue between 2014 and 2016. Smolensk's direct risk growth will slow down as the deficit gradually narrows to 8%-10% of total revenue in 2014-15 and 4% in 2016 driven by capex cuts and higher tax proceeds. An additional RUB2bn will come from the City of Smolensk in 2015-16 when it repays the loan borrowed from the region in 2010-11.

Medium:
Fitch expects the region will continue to receive support from the federal government. The region receives federal transfers for operating and investment spending, which are to a large extent earmarked for specific purposes. During 2012-13, federal transfers represented a considerable 33% of total revenue.

Subsidised budget loans have interest rates of 0.1%-2.0% and amounted to RUB10.9bn or 57% of the region's direct risk as of 1 July 2014. Of this, RUB2bn was on-lent to the City of Smolensk. Federal support provides some stability during recession, making the region less vulnerable to external shocks.
Fitch forecasts the region's operating performance to remain weak in 2014-16, with a positive, albeit close to zero, operating balance and negative current balance. Smolensk's operating balance turned positive at 1% of operating revenue in 2013 (negative 1% in 2012), but the current balance remained in deficit. Historically, the region's budgetary performance has been weak, with a negative operating balance between 2008 and 2012. The deficit averaged 14% of total revenue in 2009-13.

Smolensk region's ratings also reflect the following key rating drivers:
The region faces significant refinancing in 2016 when RUB14bn or 74% of direct risk matures. Fitch does not expect the region will face difficulties refinancing, although the weak current balance leaves the region dependent on access to capital markets for refinancing and capex funding in the medium term.
The region's direct risk rapidly increased by 39% in 2013 to about RUB20bn, equivalent to 73% of its current revenue, due to lower than expected tax proceeds and high spending linked to infrastructure modernisation of the region's capital, the City of Smolensk.

The ratings are negatively affected by the evolving nature of the institutional framework for local and regional governments (LRGs) in Russia. It has a shorter track record of stable development than many of its international peers. The predictability of Russian LRGs' budgetary policy is constrained by the continuous reallocation of revenue and expenditure responsibilities within the government tiers.

RATING SENSITIVITIES
The ratings could be upgraded if the region records an operating balance sufficient to cover interest expenses on a sustained basis, accompanied by stabilisation of direct risk.

A negative operating balance coupled with growing refinancing pressure due to an increasing proportion of short-term bank loans would lead to a downgrade.