OREANDA-NEWS. April 28, 2015. Fitch Ratings has affirmed the Russian Mari El Republic'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 republic's National Long-term rating at 'AA-(rus)' with Stable Outlook. Mari El's outstanding senior unsecured domestic bonds have also been affirmed at 'BB' and 'AA-(rus)'.

KEY RATING DRIVERS
The affirmation reflects Mari El's satisfactory fiscal performance, moderate direct risk with limited exposure to refinancing risk, and low contingent risk. The ratings also consider the deteriorating macroeconomic environment and the republic's modest economic profile.

Fitch expects Mari El to continue posting satisfactory fiscal performance in 2015-2017, with operating surplus at about 8%-9% (2014: 7%). This will be driven by prudent management aimed at cost control and a steady increase in operating revenue, with an expected average growth rate of about 5% in the medium term.

The republic's deficit before debt variation widened slightly to 9.6% of total revenue in 2014 from 7.7% in the previous year. We expect it to scale back to below 10% of total revenue in the medium term, driven by an expected reduction in capex to about 13% of total spending (2010-2014: average 22%).

Fitch expects Mari El's direct risk to be about 57%-60% of current revenue in 2015-2017 (2014: 47%). The republic's direct risk increased to RUB10.7bn in 2014 from RUB8.7bn a year earlier. The composition of the region's debt changed last year, with an increased proportion of budget loans, which went up to 42% of 2014 debt stock (2013: 13%). Mari El also issued a RUB2bn domestic bond in 2014, further improving the diversification of its debt portfolio. Bonds increased to 24% of total debt stock followed by bank loans (34%).

The republic's debt profile is likely to be extended in 2015 as the federal government is about to lengthen the maturities of the outstanding budget loans contracted by the region up to 2024-2034. Fitch notes that despite an expected increase in direct risk, the proportion of market (bank loans and bonds) debt in the republic's debt stock is not likely to exceed 40% of current revenue by 2017, partially offsetting increased costs of borrowing.

Fitch assesses Mari El's exposure to refinancing risk as moderate. Refinancing needs are limited to the repayment of domestic bonds totalling RUB1.4bn coming due in October and December 2015. The region is about to contract RUB700m of budget loans from the federal government. Fitch expects the republic's contingent risk to remain limited to the minor debt of its public sector entities and guarantees.

Mari El's liquidity position is satisfactory with cash reserves sufficient to cover occasional cash mismatches in line with the ratings. Interim liquidity is also supported by use of short-term treasury loans at subsidised rates.

Mari El's socio-economic profile is historically weaker than the average of other Russian regions. Its per capita gross regional product was 30% lower than the national median in 2012-2013. Nonetheless, according to the administration's preliminary estimates the regional economy expanded 2.6% yoy in 2014 (2013: 1.9% yoy). The republic expects moderate economic growth of around 3%-3.5% yoy in 2015-2017.

RATING SENSITIVITIES
The ratings could be positively affected by an improved budgetary performance leading to deficit before debt decreasing below 5% of total revenue, coupled with an extension of the debt maturity profile.

Conversely, a downgrade or revision of the Outlook to Negative could result from sustained deterioration of operating performance with an operating margin below 5%, coupled with weaker debt coverage (2013: eight years) exceeding average debt maturity (2013: four years) over the medium term.