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

KEY RATING DRIVERS
The ratings reflect the region's weak budgetary performance, rising debt, significant refinancing pressure and a weak economic profile. The ratings also factor in the region's still moderate direct risk compared with international peers and its low contingent liabilities.

The Negative Outlook reflects Fitch's expectation that the region's revenue will stagnate, its expenditure will be under pressure amid economic slowdown that could lead to further growth of Kirov's direct risk.

Fitch expects Kirov Region's direct risk will grow to RUB24bn by end-2015 or 62% of current revenue and further to 70% by end-2017 (2014: RUB21bn or 54%). The region is exposed to high refinancing pressure as it faces repayment of 60% of its direct risk in 2015. Refinancing risk is increasing due to rising cost of borrowing and a lack of long-term financing on the domestic financial market. We expect domestic interest rates in 2015 to increase twofold from their 2014 level, making new debt more expensive. During 2015 the region has to refinance RUB11.8bn of short-term bank loans and additionally borrow about RUB3bn for budget deficit funding.

We expect the region to receive a subsidised budget loan in 2015 as before, which will help to ease immediate refinancing pressure. In 2014 Kirov received a RUB4.9bn three-year budget loan at 0.1% annual interest rate, which extended its debt maturity profile to 2017 and limited the growth of interest expenses. This increased the proportion of budget loans in the region's debt portfolio to 34% at end-2014 from 17% a year earlier.

Fitch forecasts the region's budgetary performance to remain weak in the medium term due to stagnating revenue and low expenditure flexibility amid the national economic downturn. This will result in the region funding its deficit with more borrowings. We project Kirov will have an operating balance close to zero and deficit before debt variation of 6%-8% of total revenue per year in 2015-2017.

In 2014, Kirov Region recorded a small positive operating balance at 0.4% of operating revenue, after a negative 3% in 2013, and narrowed its budget deficit to 9% of total revenue from 14% during the same period. This was mostly due to limited growth of operating expenditure (5% in 2014) and lower capex at 14% of total spending, down from an average 18% in 2011-2013.

The region's economic profile remains weaker than the average Russian region. Gross regional product (GRP) per capita was 66% of the national median in 2012. Fitch forecasts 4% contraction of national GDP in 2015, and believes the region will also face a slowdown of economic activity, which could lead to a deterioration of its budgetary performance.

RATING SENSITIVITIES
Growth of direct risk above 70% of current revenue and low operating balance insufficient for interest payments would lead to a downgrade.