OREANDA-NEWS. July 28, 2015. Fitch Ratings has affirmed Russian Kirov Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB-', with Negative Outlooks, and its Short-term foreign currency IDR at 'B'. The agency has also affirmed the region's National Long-term rating at 'A+(rus)' with a Negative Outlook.

The Negative Outlook reflects Fitch's expectations that direct risk will continue to grow, driven by a persistent budget deficit and as the current balance will not restore to positive in the medium term. The affirmations reflect the region's key stable credit metrics over the past six months, weak budgetary performance, moderate direct risk and modest economic profile.

KEY RATING DRIVERS
Fitch expects that Kirov's operating performance will remain weak in the medium term. The agency forecasts a marginal improvement in the operating balance towards 2% of operating revenue (2014: 0.6%) while the current balance will remain negative. The improvement will be supported by better than expected collection of corporate income tax in 1H15 and cost-cutting measures undertaking by the region's government. However, the headroom for significant improvement in financial performance is low.

Fitch forecasts the region's direct risk will continue growing in the medium term. Fitch anticipates that the deficit before debt variation will average 8% of total revenue in 2015-2017 that will lead to direct risk increase beyond 70% of current revenue by end-2017 (2014: 54%). In 2014, direct risk increased to 54% from 47% in 2013. However, the adverse effect of this increase will be partly mitigated by a structural improvement in the region's debt profile.

The proportion of market debt decreased to 34% at end-June 2015 from 66% at end-2014 as Kirov received state support in the form of a RUB5.9bn federal budget loan and refinanced part of its maturing bank loans. The new budget loan has three-year maturity and bears 0.1% interest rate, which will help Kirov to save on interest expenses over the medium term.

The region's economic profile is weaker than the average Russian region. Gross regional product per capita was 65% of the national median in 2013. The economy is diversified. The top 10 taxpayers contributed less than 20% of the region's tax revenue in 2014. The major taxpayers are spread across various sectors of the economy, which makes the region's tax proceeds less vulnerable to the economic cycle.

RATING SENSITIVITIES
Growth of direct risk above 70% of current revenue and low operating balance insufficient for interest payments would lead to a downgrade.