OREANDA-NEWS. March 16, 2015. Fitch Ratings has affirmed Russian Penza Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB', with Positive 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 Positive Outlook.

KEY RATING DRIVERS
Fitch expects the region will continue to demonstrate a sound budgetary performance over the medium term. The operating balance will account for 12%-13% of operating revenue in 2015-2017 in line with actual results for 2014, when it amounted to 13.3%. The strong operating performance will be supported by the control of operating expenditure and moderate growth of operating revenue. The largest regional taxpayers include several enterprises related to the food industry, which are non-cyclical and will support the regional tax base amid the national macroeconomic downturn.

Fitch assumes the deficit before debt will not exceed 4% of total revenue in 2015 supported by the limitation of capital expenditure. Fitch expects capital expenditure will decline to an average 12% of total spending annually in 2015-2017 from a high average of 25% in 2013-2014. In 2014, the budget deficit fell sharply to 2% of total revenue after a peak of 15% one year earlier. The exceptionally high deficit in 2013 was driven by infrastructure modernisation in the City of Penza for its 350 year anniversary in September 2013.

In Fitch's view, direct risk will stabilise in the range of 50%-55% of current revenue over the medium-term. In 2014 the direct risk stood at RUB21.2bn or 52.3% of current revenue (2013: RUB18.5bn, or 52.7%). The structure of the debt improved in 2014 as region replaced part of the commercial bank loans by loans from the federal budget provided at 0.1% annual interest rate. This also helped the region to economise on the interest costs.

Fitch views the immediate refinancing risk as low. In 2015 the region has no repayments on its commercial debt, and has to redeem only RUB2.6bn of federal budget loans. Penza plans repayment of the budget loans from its revenue without recurring to the capital market. Overall the maturity profile is quite smooth while the debt payback ratio (direct risk to current balance) at below five years in 2014 matches Penza's maturity profile.

Penza's economy is historically weaker than the average Russian region with GRP per capita at 72% of the national median in 2013. This has led to weak tax capacity compared with national peers. Current federal transfers constitute a significant proportion of operating revenue, which limits the region's revenue flexibility. Nevertheless, dependence on federal transfers had been gradually decreasing, to 40% of operating revenue in 2013-2014 from 52% in 2009, while the regional economy's growth outpaced the national average during 2011-2014.

RATING SENSITIVITIES
The relief of negative macroeconomic pressure accompanied by the consolidation of sound operating performance in line with 2013-2014 actuals could lead to an upgrade.

KEY ASSUMPTIONS
Fitch assumes that downturn of the national economy will not lead to a significant contraction of Penza Region's revenue base.

Fitch also assumes that the region will continue to receive a steady amount of current transfers from the federal government despite the worsening of public finances at the federal level.