OREANDA-NEWS. March 16, 2015. Fitch Ratings has downgraded Ulyanovsk Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'B+' from 'BB-' and National Long-term rating to 'A(rus)' from 'A+(rus)'. The Outlooks on the Long-term ratings are Negative. The region's Short-term foreign currency IDR has been affirmed at 'B'.

KEY RATING DRIVERS
The downgrade and Negative Outlook reflect the following rating drivers and their relative weights:

HIGH
Fitch no longer expects that Ulyanovsk's operating balance will be restored to a positive amount in the medium term. The region remains under pressure due to the national economic downturn and significant rigidity of operating expenditure, which is mostly made up of non-flexible items such as staff costs, mandatory grants and state-regulated welfare spending. The region's budgetary performance remained weak in 2014 with a negative operating balance of 7% of operating revenue for a second consecutive year, which is not commensurate with a 'BB-' rating.

Fitch expects that the region's deficit before debt variation will exceed 10% of total revenue in 2015-2016 as the region has a rigid expenditure structure and limited ability to reduce capex. In 2014, the region's capex declined to a low 8% of total expenditure from 16% in 2011-2013. In 2014, Ulyanovsk's budget deficit was 8.2%, down from a high 16% in 2013 as the region received but did not utilise RUB2bn capital transfers earmarked for the construction of a hospital facility.

Fitch expects Ulyanovsk's direct risk to grow in the medium term towards 70% of current revenue by 2017 (2014: 51%) driven by structured deficit. By end-2014 the region's debt stock reached RUB17bn (2013: RUB12.9bn) and was 73.5% composed of three to five-year bank loans and budget loans (26.5%) maturing in 2015-2017.

Fitch forecasts the debt maturity profile will shorten in the medium term due to the lack of access to long-term financing on the capital market. Domestic interest rates in 2015 will increase to twice their 2014 level, which will make new market debt more expensive and put additional pressure on the budget. In 2015 Ulyanovsk needs to repay RUB2.5bn bank loans and RUB0.6bn budget loans. Fitch expects that the maturing budget loans are likely to be rolled over and the maturing bank loans will be refinanced on the capital market unless the federal government provides more grants.

MEDIUM
The region's economic profile is weaker than the average for Russian regions . GRP per capita was 78% of the national median in 2012. The region's administration estimated that Ulyanovsk's GRP declined by 3% in 2014 resulting from the national economic downturn. Fitch forecasts 4% contraction of Russia's GDP in 2015, and believes the region will also face a slowdown in economic activity, which will pressurise its budgetary performance.

Ulyanovsk Region's ratings also reflect the following key rating drivers:

Fitch expects that Ulyanovsk's dependence on support from the federal government is growing, driven by the region's weak self-financing capacity and rising cost of market borrowings. In 2014 the proportion of subsidised budget loans in the region's debt portfolio increased to 26.5% (RUB4.5bn) from 20.7% (RUB2.7bn) in 2013 and federal transfers remained at about 30% of total revenue, the same as a year before.

Fitch forecasts that support from the federal budget is unlikely to exceed its 2014 level due to the challenging situation with the execution of the state budget in the current year. The region's administration expects to contract about RUB2bn budget loans to refinance part of banks loans due in 2015. The five-year RUB1bn budget loans received in 2010-2011 for construction and repairing of roads are likely to be extended until 2025. Fitch expects that these measures will help Ulyanovsk restrain the current debt service cost but does not believe they will substantially improve the region's fiscal performance in the medium term.

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