OREANDA-NEWS. Fitch Ratings has affirmed Russian Kursk Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB+', with Stable Outlooks, and its Short-term foreign currency IDR at 'B'. The agency has also affirmed the region's National Long-term rating at 'AA(rus)' with Stable Outlook.

The affirmation reflects the region's low direct risk and contingent liabilities and a large capacity to self-finance capex. The ratings also factor in the moderate size of the region's budget, satisfactory operating balance and modest, but growing, local economy.

Fitch expects the operating balance will stabilise at 5%-7% of operating revenue in the medium term, which is lower than the average of 18% during 2009-2012. In 2013, the operating balance deteriorated to 4.9% of operating revenue, due to a significant 17% increase in operating expenditure following the federal government's decision to increase public sector salaries. Fitch forecasts that pressure on the operating expenditure will continue in the medium-term. Positively, Fitch expect the operating balance to remain sufficient for debt servicing needs in 2014-2016.

Fitch believes the region will reduce its historically high capex to 16%-18% of total spending over the medium term (2011-2013: average 26%) to limit its budget deficit at an average 5% of total revenue. The region's self-financing capacity (current balance and capital revenue) is forecast to remain strong and to cover around 75% of capex in 2014-2016 (2013: 80%).

Fitch expects the region's direct risk will remain low in the medium term, and to account for around 15% of current revenue in 2014, supporting its strong debt payback ratio of three years. As of 1 November 2014 the region was free from commercial debt, and had only RUB3.8bn of federal budget loans. The region's administration aims to minimise the share of market debt in total debt to save on interest costs.

During 2011-2013 the region's economic growth outpaced the national average. The administration expects 4% growth of gross regional product (GRP) for 2014, which should again outperform the national average. Nevertheless, the region's economy is still modest, with GRP per capita 7% lower than the national median in 2012. The region has a diversified industrial sector and is strong in agriculture.

RATING SENSITIVITIES
Growth of short-term debt leading to high refinancing pressure, accompanied by further deterioration of operating performance, would lead to a downgrade.

The restoration of the operating balance to its historically high level of around 15% of operating revenue, coupled with debt payback aligned with the average maturity profile of the region's debt, would lead to an upgrade.