OREANDA-NEWS. March 16, 2015. Fitch Ratings has revised Russian Nizhniy Novgorod Region's Outlook to Negative from Stable and affirmed its Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB', National Long-term rating at 'AA-(rus)' and Short-term foreign currency IDR at 'B'.

Nizhniy Novgorod Region's outstanding senior unsecured domestic bonds have been affirmed at 'BB' and 'AA-(rus)'.

KEY RATING DRIVERS
The revision of the Outlook to Negative from Stable reflects growing direct risk accompanied by high refinancing pressure. Increased interest rates on market debt place additional strain on the interest costs, significantly weakening the region's current balance.

The Outlook revision reflects the following rating drivers and their relative weights:

HIGH
The region's refinancing risk is high. During 2015-2017 it has to redeem 91% of direct risk. In 2015 the region faces repayment of RUB37.9bn (58% of total direct risk), of which RUB29bn is short-term bank loans. Fitch does not expect the region will have problems rolling over the debt due to its strong relationships with state-owned commercial banks and committed credit lines, which cover around 50% of refinancing needs. The risk is around increased market rates, which will make debt servicing more expensive and eventually lead to a significant deterioration of the current balance. The region plans to continue using short-term federal budget loans within the financial year, which could partially mitigate the pressure on interest costs.

Fitch expects the region's direct risk will continue to increase gradually over the medium term to exceed 70% of current revenue in 2017. The administration plans to limit both operating and capital spending to control the budget deficit. Fitch assumes that some limitation is possible, but also believes that the region's capex will remain higher than the national average as it will need to prepare for the World Football Championship to be held in Nizhniy Novgorod in 2018. Most of the funding will come from the federal budget, but the region will need to co-finance several items.

The direct risk increased to 58.5% of current revenue in 2014 (2013: 55%). The region stopped issuing domestic bonds in 2014 due to the unstable situation on the capital market and instead borrowed short-term loans from banks at end-2014 to finance the deficit. During 2014, the region actively used short-term (up to 30 days) federal budget loans provided to the Russian regions at 0.1% interest rate to cover temporary cash mismatches. This allowed the region to save on interest payments.

MEDIUM
Fitch expects the region's operating performance to remain satisfactory in 2015-2017 with an operating balance at around 5%-6% of operating revenue. The current balance will further deteriorate and hover around zero over the medium term, reflecting increasing interest payments. In 2014, the operating balance accounted for 6.9% of operating revenue deteriorating from 10% in 2013 due to continuous pressure on operating expenditure stemming from presidential decrees on increasing salaries to public employees.

Nizhniy Novgorod has a strong and well-diversified economic sector with wealth metrics above the national median. According to preliminary data, the GRP increased by 1% yoy in 2014, which is only marginally better than the national weak growth of 0.6%. The agency expects that the unfavourable macroeconomic trend will have a negative impact on the region's industrialised economy. According to Fitch's projections, national GDP will decline by 4% in 2015. The regional administration is more optimistic, and expects the regional economy will demonstrate 2% growth in 2015.

RATING SENSITIVITIES
An increase in direct risk to above 70% of current revenue accompanied by on-going refinancing pressure or inability to maintain sustainable positive current balance could lead to a downgrade.