OREANDA-NEWS. April 21, 2015. Fitch Ratings has downgraded Russian Republic of Komi's Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'BB' from 'BB+' and National Long-term rating to 'AA-(rus)' from 'AA(rus)'. The Outlooks are Stable. The region's Short-term foreign currency IDR has been affirmed at 'B'.

Fitch has also downgraded the region's RUB11.86bn senior unsecured domestic bonds' Long-term local currency rating to 'BB' from 'BB+' and National Long-term rating to 'AA-(rus)' from 'AA(rus)'.

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

HIGH
Fitch expects Komi's overall deficit to remain high, at about 10% of total revenue in 2015-2017, which will lead to growth in debt to about 60% of current revenue by end-2015 and about 70% of current revenue by 2016-2017. Komi's direct risk increased to 53% of current revenue or RUB28bn at end-2014, from 37% or RUB17.5bn a year earlier. The overall deficit remained high at 19% of total revenue in 2014 (2013: 24%).

Komi faces a refinancing peak in 2015 when RUB10.9bn matures. This represents about 40% of total direct risk at 1 January 2015. Another RUB9.6bn or 34% of debt matures in 2016. The region also needs to borrow funds to finance the expected 2015 deficit of about RUB7bn.

Fitch does not expect Komi to face difficulties in accessing debt markets or rolling over its existing loans with Sberbank of Russia (BBB-/Negative/F3). Moreover, the federal government has committed to providing RUB5.4bn low-cost budget loans to help the region refinance half of its maturing market debt in 2015. However, high market interest rates will put further pressure on and weaken already low debt servicing and coverage ratios.

MEDIUM
Fitch expects budgetary performance with low operating surpluses leading to weak debt servicing and coverage ratios in 2015-2017. The region's budgetary performance remained weak in 2014 with a negative operating balance of 3% of operating revenue (2013: negative 7%), which is not commensurate with a 'BB+' rating.

The republic's budget faces high pressure on expenditure following the federal government's election pledges, including the decision to align public sector salaries with Komi's fairly high average salary. The federal government has provided a low amount of transfers, accounting for 12% of operating revenue in 2014, while Komi's tax revenue proportion of operating revenue increased to 86% in 2014 compared with an average of 77% in 2010-2012.

Komi's ratings also reflect the following key rating drivers:

Komi has a strong economy with wealth indicators significantly above the national median. Gross regional product per capita in 2013 exceeded the national median by more than 2x while the average salary in the region in December 2014 exceeded the national median by 55%.

The strong economy is weighted towards the natural resources sector, leading to high tax concentration. The top two taxpayers - OAO LukOil (BBB-/Negative/F3) and OAO Gazprom (BBB-/Negative/F3) - together contributed 25% of total tax revenue in 2013. A harsh climate and the republic's remote location from major markets hinder investments in industries outside natural resources.

Fitch forecasts 4.5% contraction of national GDP in 2015, as the country suffers from weak oil prices and international trade and financial sanctions. However, the major companies operating in the region are export-oriented and will benefit from the more than 40% depreciation of rouble. This will lead to better economic results in Komi compared with the national average.

RATING SENSITIVITIES
Growth in direct risk to above 70% of current revenue, coupled with negative operating balances on a sustained basis and a reduced capacity to obtain affordable funding for its debt refinancing needs, will lead to a downgrade.

Positive rating action is unlikely under Fitch's base case scenario. However, restoration of consistently strong budgetary performance and stabilisation of debt levels would be positive for the ratings.