OREANDA-NEWS. July 28, 2015. Fitch Ratings has revised Russian Ryazan Region's Outlook to Stable from Negative and affirmed the region's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'B+', Short-term foreign currency IDR at 'B' and National Long-term rating at 'A(rus)'.

The region's outstanding senior unsecured domestic bond issues have been affirmed at Long-term local currency 'B+' and National Long-term 'A(rus)'.

KEY RATING DRIVERS

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

High:

Fitch expects Ryazan region's operating surplus to be 6%-7% of operating revenue in 2015-2017, which will be sufficient to cover interest payments. This compares with our previous expectation of 3%-4%. Our revised forecasts are based on the region's resilient tax base, with an expected tax revenue increase of 4% yoy in 2015, and on continued operating spending (opex) restraint. Ryazan's operating balance improved to 7% of operating revenue in 2014, from 3% in 2013, as the region reined back opex to a 1% increase in 2014, compared with an average 8%-9% in 2010-2013.

The region's 2014 full-year deficit before debt variation narrowed materially to 6% of total revenue from 18% a year earlier, driven by capex cut to 12% of total spending, from 19% in 2013. We expect the deficit before debt variation to continue shrinking in the medium term, to 2%-3% of total revenue, underpinned by reduced capex and opex control.

Fitch expects the region's direct risk to be stable at 78% of current revenue in 2015 and 75% in 2016-2017. In 1H15 direct risk stabilised at RUB26.9bn. Debt management improved in 2013-2015, which resulted in extended debt maturity and greater debt diversification. At end-June 2015 debt stock was 50% federal budget loans, followed by bank loans (41%) and domestic bonds (9%).

The region's debt coverage and debt servicing ratios remain weak, while subsidised federal budget loans received in 1H15 have partly offset refinancing needs on maturing bonds. The region repaid matured domestic bonds of RUB625m in June 2015, half of which were through federal budget loans contracted at subsidised rates. Following the repayment, the region's immediate refinancing needs to end-2015 are limited to RUB2.9bn worth of federal budget loans. Fitch expects the region to negotiate an extension of the federal budget loans coming due in 2015.

Medium:

Ryazan region's administration expects the local economy to continue to grow 1.5%-3% annually in 2015-2017. According to the administration's estimates, the local economy expanded 1.7% in real terms in 2014, which exceeded the estimated real growth of the Russian GDP of 0.6%. The region's economy is modest in the national context but is fairly diversified and benefits from close proximity to Moscow, the country's capital and its largest market.

Ryazan region's ratings also reflect the following key rating drivers:

Russia's institutional framework for local and regional governments is a constraint on the region's ratings. It has a shorter track record of stable development than many of its international peers. The predictability of Russian LRGs' budgetary policy is constrained by the continuous reallocation of revenue and expenditure responsibilities within government tiers.

RATING SENSITIVITIES

Increased total indebtedness with net overall risk above 90% of total revenue, accompanied by persistent refinancing pressure and a negative current balance, would lead to a downgrade.

A positive rating action could result from improvement of the region's fiscal performance, leading to a smaller budget deficit consistently below 5% of total revenue and improved debt coverage ratio (as measured by direct risk/current revenue) of less than 70% on a sustained basis.