OREANDA-NEWS. July 28, 2015. Fitch Ratings has affirmed the Russian Kostroma Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'B+' with Negative Outlooks, Short-term foreign currency IDR at 'B' and National Long-term rating at 'A-(rus)' with a Negative Outlook. Kostroma region's outstanding senior unsecured domestic bonds have been affirmed at 'B+' and 'A-(rus)'.

The affirmation and Negative Outlook reflect pressure on the ratings due to persistently high refinancing risk and Fitch's expectation that the region's budgetary performance will be weak.

KEY RATING DRIVERS
The 'B+' rating reflects the region's material direct risk, with considerable refinancing needs concentrated during next 12 months. The ratings also factor in its ongoing fiscal deficit and below average metrics of local economy. We expect operating performance in 2015-2017 will remain weak, with an operating balance of 2% of operating revenue and a negative current balance due to increasing interest expenses. Sluggish tax proceeds are likely to be mitigated by the stable inflow of federal transfers, which we expect to be 28% of operating revenue in 2015-2017.

The region's 2014 budgetary performance deteriorated below Fitch's expectations. The operating balance declined to 0.2% of operating revenue in 2014, from a sound 7.5% in 2013. This was caused by continued pressure on opex and lower than expected tax collection amid a tough economic environment.

Fitch expects the region's direct risk to continue rising and account for 93% of current revenue by end-2015, driven by a RUB2bn fiscal deficit (10% of total revenue) amid sluggish operating revenue growth. We expect the region's deficit to narrow in 2016-2017, but to still represent 6%-8% of total revenue. Direct risk rose in 2014 to RUB15.9bn or 86% of current revenue at end-2014 (2013: RUB11.7bn and 67%). This was to fund a widening deficit of 17.6% of total revenue (2013: deficit of 10.5%).

A large part of Kostroma's debt is short term, with 36% of total direct risk (RUB5.5bn) maturing in 2015 and a further 57% (RUB8.8bn) of outstanding debt due in 2016-2017. Fitch expects the region's current balance for 2015-2017 to be in negative territory, leading to more capital market funding. Fitch believes the region will be able to attain the required funding in advance of the existing debt maturity dates.

Refinancing risk is partly mitigated by the region's reliance on federal budget loans, which accounted for 40% of direct risk at 1 July 2015. We believe maturing federal budget loans are likely to be rolled over. According to Kostroma, the federal government will likely provide an additional RUB3.8bn to the regional budget in 2015 for refinancing of maturing bank loans and deficit financing.

Kostroma's tax base has historically been modest, limiting its own fiscal capacity. Fitch forecasts a 3.5% contraction of national GDP in 2015, and believes the region will also face a slowdown of economic activity, which would contain tax revenue proceeds.

RATING SENSITIVITIES
The region's inability to curb growth of total indebtedness, accompanied by persistent refinancing pressure and a negative operating balance, would lead to a downgrade.