OREANDA-NEWS. April 28, 2015. Fitch Ratings has affirmed the Moscow 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 Moscow Region's still sound, albeit declining, budgetary performance, low debt, strong liquidity and wealth and economic indicators above the national median. The ratings also factor in stagnating tax revenues amid national economic downturn, a moderate deficit driven by increasing capex, and an extensive public sector with high contingent risk to the region's budget.

Fitch forecasts the region will record a sound operating balance at 8%-10% of operating revenue (2014: 7.5%) in the medium term, allowing for strong coverage interest expenses of 3.5x (2014: 5.6x) despite increasing funding costs. In 2014, the region's operating margin declined to 7.5% from 10% a year earlier, as increased social responsibilities caused operating expenditure growth to outpace that of operating revenue.

Fitch expects Moscow Region's budget deficit to widen towards 5% of total revenue (2014: 1.5%) as the region continues its investment in infrastructure and maintains capex at an average 15% of total expenditure in 2015-2017 (2014: 14%). A significant 95% of the capex will be funded by the region's strong current balance, capital revenue and cash reserves.

Given the region's strong self-financing capacity, Fitch expects direct risk to stabilise at about 30% of current revenue (2014: 30.5%) in the medium term. At end-March 2015, debt consisted of RUB64.1bn of three- to five-year bank loans and RUB38.7bn of budget loans due in 2015-2017. In 2014, Moscow Region drew down all open credit lines and accumulated RUB60.7bn cash on its account at end-2014. High cash reserves covered about 60% of the region's outstanding debt.

Moscow Region places its temporarily free liquidity in deposits, whose high interest income provides additional revenue to the budget. In 2014, financial revenue amounted to RUB1.1bn, which covered about 25% of interest expenses paid by the region.

The region's medium-term refinancing pressure is low. For 2015-2016 it needs to repay RUB26.8bn of budget loans. Refinancing peaks in 2017-2018 when all its bank loans (62% of total debt stock) mature. Fitch does not expect the region to have any problem with debt refinancing and forecasts that a portion of budget loans due in 2015 will be rolled over by the federal government.
Moscow Region directly and indirectly controls an extensive public sector, consisting of more than 100 companies. This creates additional contingent risk for the regional budget and puts pressure on budget expenditure through administrative expenses and subsidies. However, Fitch does not consider risk from the sector to be significant due to the large size of the region's budget and prudent debt management.

The region has a well-diversified economy based on services and processing industries. The region's proximity to the City of Moscow supports its wealth and economic indicators above the national median. In 2013, GRP per capita was 37% above the national median and in December 2014 average salary was 54% over the national median. Fitch forecasts 4.5% contraction of national GDP in 2015, and believes the region will also face a slowdown of activity although its economic indicators should remain strong.

RATING SENSITIVITIES
An upgrade is unlikely given the pressure on the sovereign's IDRs (BBB-/Negative). However, restoration of the operating margin to the historical high of above 15%, accompanied by sound debt metrics with direct risk-to-current balance at below the average debt maturity profile, could lead to an upgrade.

A sharp growth of direct risk to above 50% of current revenue, coupled with deterioration of operating performance resulting in weak debt coverage, could lead to a downgrade.