OREANDA-NEWS. February 09, 2015. Fitch Ratings has downgraded Volgograd Region's Long-term foreign and local currency Issuer Default Ratings (IDR) to 'B+' from 'BB-' and National Long-term rating to 'A(rus)' from 'A+(rus)'. The Outlooks on the Long-term ratings are Stable. The region's Short-term foreign currency IDR has been affirmed at 'B'.

The region's outstanding RUB15.55bn senior unsecured domestic bonds have also been downgraded to 'B+' from 'BB-' and 'A(rus)' from 'A+(rus)'.

KEY RATING DRIVERS
Volgograd region's ratings reflect its growing debt, weak budgetary performance and low expenditure flexibility. The ratings also factor in the deterioration of the national economic environment, which puts pressure on budgetary performance and could lead to increasing refinancing pressure in the medium term.

The downgrade reflects the following rating drivers and their relative weights:

High
Budgetary performance has remained weak since 2009 with low operating surpluses and deteriorated further in 2014. The operating balance was insufficient for RUB3.1bn interest payments in 2014. Operating revenue increased by a strong 20%, but the administration could not control expenditure, which increased at a similar rate in 2014.

Fitch expects weak, close to zero operating balances and negative current balances in 2015-2017. The federal government's election pledges and high interest rates lead to low expenditure flexibility and continue to drive expenditure growth. Fitch expects revenue will stagnate due to the economic slowdown. This will result in continued deficits being covered by more borrowing in the medium term.

Medium
Volgograd region's direct risk increased to RUB40.8bn or 59% of current revenue at end-2014 (2013: RUB32.7bn or 57%). Debt coverage and debt servicing ratios are weak due to low operating surpluses. Fitch forecasts that ratios will remain weak in the foreseeable future with the operating balance insufficient to cover interest expenses and direct risk will grow to about 70% of current revenue by end-2015.

The region's immediate refinancing needs are moderate: RUB7.8bn or 19% of direct risk matures in 2015. However, high interest rates put high pressure on refinancing maturing debt and attracting additional debt for deficit financing.

The refinancing risk is partly mitigated by the increasing share of federal budget loans, which accounted for RUB12.2bn or 30% of direct risk at end-2014 (2013: RUB4.8bn or 15%). Maturing federal budget loans are likely to be rolled over.

Volgograd region has an industrial economy, which provides a strong tax base but leads to high revenue volatility as tax revenue contributed 76% of operating revenue in 2014 (2013: 80%). Fitch forecasts 4% contraction of national GDP in 2015, and believes the region will also face a slowdown of economic activity, which would lead to a deterioration of its concentrated tax base -the top 10 taxpayers contributed 42% of total tax revenue in 2013-2014.

RATING SENSITIVITIES
The region's inability to curb continuous growth of total indebtedness, accompanied by persistent high refinancing pressure and a negative current balance, would lead to a downgrade.

Additional support from the federal government leading to a stabilisation of indebtedness and improvement of the operating balance sufficient to cover interest payments could lead to an upgrade.

Contact:
Primary Analyst
Behruz Ismailov
Associate Director
+7 495 956 99 01
Fitch Ratings CIS Ltd
26 Valovaya Street
Moscow 115054

Secondary Analyst
Vladimir Redkin
Senior Director
+7 495 956 9901

Committee Chairperson
Guido Bach
Senior Director
+49 69 768076 111

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Ksenia Ivanova, Moscow, Tel: +7 495 956 99 01, Email: ksenia.ivanova@fitchratings.com.

Additional information is available on www.fitchratings.com.

Applicable criteria, 'Tax-Supported Rating Criteria', dated 14 August 2012, and 'International Local and Regional Governments Rating Criteria', dated 23 April 2014, are available on www.fitchratings.com.