OREANDA-NEWS. April 28, 2015. Fitch Ratings has revised the Russian Republic of Khakassia's Outlook to Negative from Stable. It has also affirmed the republic's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB', National Long-term rating at 'AA-(rus)' and Short-term foreign currency IDR at 'B'.

The republic's outstanding senior unsecured domestic bonds have been affirmed at 'BB' and 'AA-(rus)'.

KEY RATING DRIVERS

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

High

Fitch expects the republic's operating balance will remain insufficient to cover interest expenses in 2015-2017, due to growing direct risk and increased funding costs. Khakassia recorded further deterioration in its operating balance in 2014, which declined to below zero from a modest 4% of operating revenue a year earlier. Increased social responsibilities in 2014 led to a substantial 15% growth of operating expenditure, outpacing a 10% increase in operating revenue.

Fitch assumes the republic's operating balance will be around 2%-4% over the medium term. This will be supported by a moderate expansion of the tax base, driven by growth of electricity output and higher profits at export-oriented top taxpayers buoyed by a weaker rouble. However, this positive development may be offset by the national economic downturn.

Fitch expects that Khakassia's direct risk will grow to 80% of current revenue by end-2017, from 61% in 2014, driven by an on-going budget deficit of about 10% of total revenue. Direct risk increased above Fitch's expectation in 2014 to RUB10.7bn (end-2013: RUB7.9bn), due to weaker budgetary performance.

The republic of Khakassia's ratings also reflect the following key rating drivers:

The republic's direct risk structure is well diversified and composed of 46% bond issues, 31% budget loans and 23% bank loans at 1 April 2015. The maturity profile is smooth and stretches until 2020. In 2015, Khakassia faces RUB4.5bn of maturing debt, or 36% of its direct risk as of 1 April 2015.

Fitch expects that the federal government will provide refinancing support to the region and will roll over RUB0.5bn of maturing budget loans plus make available at least RUB0.9bn budget loans to refinance market debt due in 2015. The remaining borrowing needs will be funded by RUB1.9bn open credit lines and new market debt that will likely be contracted at higher interest rates and raise interest expenses.

Khakassia's economic profile is sound with wealth metrics in line with the national median. Gross regional product per capita was 102% of the national median in 2013 and average salary was 117% of the national median in December 2014. However, the tax base is concentrated in a few companies in the mining, non-ferrous metallurgy and hydro-power generation sectors. The 10 largest taxpayers contributed 44.5% to the republic's tax revenue in 2014 (2013: 43.6%). Taxes provided 71% of operating revenue in 2014.
RATING SENSITIVITIES

The inability to restore a positive current balance and to narrow the deficit to below 10% of total revenue could lead to a downgrade.