OREANDA-NEWS. April 21, 2015. Fitch Ratings has affirmed Russian Tambov Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB+' with Stable 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 a Stable Outlook.

KEY RATING DRIVERS
The ratings reflect the region's strong operating performance, moderate, albeit increasing, direct risk and above-average economic growth amid the current negative national economic trend. The ratings also factor in high refinancing needs and the modest size of the economy, resulting in reliance on transfers from the federal budget.

Fitch expects Tambov to maintain a sound budgetary performance in 2015-2017. The operating balance will consolidate at 10% of operating revenue, which is in line with 2014 actuals. The stable performance will be supported by the steady flow of transfers from the federal budget and further expansion of the region's tax base, mostly in the agricultural sector and processing industry. Historically, the federal government has provided Tambov with a high level of current transfers (2012-2014: close to 50% of operating revenue) to compensate for the region's low tax capacity.

Fitch expects Tambov's capex to decline slightly in the medium term but remain sound at above 20% of total expenditure (2013-2014: 30%). The region's capex will be supported by the federal government's continuing transfers, which are earmarked for the agricultural sector in order to support development of domestic food production amid the lasting embargo on the import of food products.

Fitch expects the region's direct risk to increase, but remain moderate in the medium term at below 40% of current revenue (2014: 32%). At March 2015, Tambov's direct risk was composed of RUB6.8bn of one to three-year bank loans and RUB5.1bn of budget loans maturing in 2015-2032.

Tambov has high refinancing needs. The region faces RUB5.7bn of maturing debt in 2015, equivalent to 48% of direct risk as of 1 March 2015. Refinancing pressure is increased by higher interest rates and a lack of long-term financing on the domestic capital market. The region plans to refinance RUB1.5bn of maturing bank loans with subsidised budget loans, while the residual debt will be refinanced by a contracted RUB4.6bn three-year bank credit line. The refinancing risk is also mitigated by Tambov's sound cash position, of RUB3.7bn at March 2015, which covers about 65% of the region's debt due in 2015.

Tambov's wealth indicators remain below the national median. Positively, the region's economy grew at a faster rate than the national economy during 2011-2014, with cumulative growth of about 40% versus national growth of 10%. Growth was driven by high investment in the region's economy, which comprised about 40% of its GRP in 2012-2014. Fitch forecasts 4.5% contraction of national GDP in 2015, and believes the region will also face a slowdown of economic activity albeit less than nationally.

RATING SENSITIVITIES
An upgrade is unlikely given the pressure on the sovereign's IDRs (BBB-/Negative). However, direct risk declining towards 20% of current revenue, coupled with a strong operating balance at above 15% of operating revenue on a sustainable basis, could trigger positive rating action.

A continuously wide budget deficit leading to growth of direct risk above 50% of current revenue, accompanied by high refinancing pressure, would lead to negative rating action.