OREANDA-NEWS. Fitch Ratings has affirmed the Russian Republic of Udmurtia's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB-', with Stable Outlooks, and Short-term foreign currency IDR at 'B'. The agency has also affirmed the region's National Long-term rating at 'A+(rus)' with a Stable Outlook. The region's outstanding senior unsecured domestic bonds' ratings (ISINs RU000A0JR530, RU000A0JRY67, RU000A0JTF76 and RU000A0JU740) have been affirmed at 'BB-' and 'A+(rus)'.

The affirmation reflects Fitch's expectation of the restoration of the region's operating performance in 2014 and deceleration of direct risk growth as well as the republic's developed economy. The ratings also factor in the continuous budget deficit and refinancing pressure over the medium term.

Fitch expects Udmurtia's fiscal performance to partially recover from 2014 onward, which will be manifested by the restoration of a positive operating balance. This financial rehabilitation is the intention of the management team that was formed after the election of a new head of the republic in September 2014. The operating balance worsened to negative 4.9% of operating revenue in 2013 due to both deceleration of revenue growth and continuous pressure on opex. The latter was caused by the federal government's pledges to increase public sector salaries.

Fitch believes the republic will gradually decrease its currently high budget deficit before debt variation to 6%-7% in 2015-2016. This will be supported by the administration's intention to strictly control growth of opex and further reduction of capital spending. The overall budget deficit widened to 16% of total revenue in 2013 (2012: 13%) contributing to the sharp increase in direct risk.

Fitch expects the growth of direct risk will decelerate in the medium term and will account for around 70% of current revenue in 2015-2016, reflecting a narrowing deficit. In 2013, direct risk increased sharply to 63% of current revenue from a moderate 40% one year earlier. However, the region held part of the debt incurred in 2013 as cash reserves, and will use this liquidity for deficit financing in 2014-2016, which will help contain direct risk growth. Fitch also notes that the debt payback ratio (direct risk to current balance) will remain weak in the medium term as Fitch do not expect the restoration of a positive current balance before 2016.

The republic remains exposed to refinancing pressure as in 2014-2016 it has to refinance 89% of total direct risk. The region has to repay RUB9.6bn by end-2014, which corresponds to 31% of total debt stock. In October 2014, the republic received a RUB6bn subsidised budget loan at 0.1% interest rate with three-year maturity, which will be used for refinancing the majority of maturing debt obligations. The residual part will be covered by unutilised credit lines. Available credit lines with commercial banks total RUB6bn and could be drawn down during three years. However, Fitch assumes the republic will use these lines in 2014 to refinance part of the maturing debt obligations, and the residual part to finance republic's capital spending.

Fitch forecasts the bank loans will continue to dominate the region's debt profile. The republic did not issue new domestic bonds in 2014 due to unfavourable macroeconomic and geopolitical conditions, which could become the reason for high interest rates. The bank loans are not likely to have maturity of more than three years, which implies that refinancing pressure will continue over the medium term. Overall, Fitch does not expect problems with debt refinancing as the administrations lock in required resources well in advance of maturity dates.

The republic has a well-diversified industrial sector, which is dominated by oil extraction, metallurgy and machine building. The republic's administration expects stability in oil extraction and modest growth of the processing industry, contributing to GRP growth of about 2% in 2014-2016. In 2013 GRP growth was close to zero in real terms.

RATING SENSITIVITIES
The inability to narrow the budget deficit to below 10% of total revenue leading to a debt increase far beyond Fitch's expectations could lead to a downgrade.

Sustainable positive current balance accompanied by stabilisation of direct risk at below 70% of current revenue could lead to an upgrade.