OREANDA-NEWS. April 28, 2015. Fitch Ratings has revised the Russian Republic of Udmurtia's (Udmurtia) 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 'A+(rus)' and its Short-term foreign currency IDR at 'B'.

Udmurtia's outstanding senior unsecured domestic bonds have been affirmed at 'BB-' and 'A+(rus)'.

KEY RATING DRIVERS

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

HIGH

Fitch expects Udmurtia's current balance will remain negative over the medium-term in light of increased interest rates on the national capital market and the republic's growing debt. At the same time the agency projects a recovery in the operating margin to 1%-3% in 2015-2017 after having been in negative territory during 2012-2014. The administration has communicated a strong intent to curb operating expenditure, which has historically expanded rapidly.

Fitch expects the republic's deficit before debt to narrow in 2015, on sharp cutbacks to capital expenditure, but to remain at a still hefty 10% of total revenue. The region does not plan to undertake new capital projects and will only complete those that are in well in advance or those which are largely co-financed by the federal government. In 2014 the deficit peaked at 21% of total revenue, due to a negative operating balance and high capex.

MEDIUM

Fitch expects direct risk will continue to increase, possibly to over 90% of current revenue in 2016. In 2014 direct risk was RUB37.9bn, or 75% of current revenue (2013: 63%). In mitigation, the republic received RUB7bn of subsidised loans from the federal government with a three-year maturity to refinance part of its capital market debt. This will help Udmurtia to save on interest costs in the medium-term.

Refinancing pressure is high as the republic faces a repayment of 94% of total direct risk in 2015-2017. For 2015 Udmurtia faces RUB10.6bn of repayments, RUB7bn of which are bank loans and the remainder is issued debt and budget loans. The republic expects to refinance almost half of the debt by RUB4.7bn of new budget loans. There is also a possibility that RUB1.3bn of budget loans due in 2015 will be rolled over by the federal government.

The remaining debt and an expected budget deficit of RUB5.7bn will be covered by bank loans. The republic plans to contract them in the 2H15 when most of the repayments are due and when market interest rates are likely to be lower.

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

The republic has a well-diversified industrial sector, which is dominated by oil extraction, metallurgy and machine building. This supports Udmurtia's wealth metrics in line with the national median. However, in 2013-2014 the republic's real economic growth was close to zero and below national growth. Fitch expects national GDP to shrink 4.5% yoy in 2015, eroding the republic's tax proceeds.

RATING SENSITIVITIES

An inability to restore the current balance to positive territory and to ease high refinancing pressure would lead to a downgrade.