OREANDA-NEWS. August 17, 2015.  Fitch Ratings has affirmed Smolensk 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 Outlooks on the Long-term ratings are Stable.

The region's outstanding senior unsecured domestic bonds have been affirmed at 'B+' and 'A-(rus)'.

The affirmation reflects Fitch's unchanged baseline scenario regarding Smolensk's weak budgetary performance and high direct risk. The Stable Outlook reflects Fitch's expectation that the Russian region will be able to address its refinancing risk over the medium term with ongoing financial aid from the federal government amid an economic downturn.

KEY RATING DRIVERS
Smolensk's ratings reflect the region's negative current balance, high debt with considerable refinancing needs concentrated in 2015-2016 and a modest economic profile.

Fitch expects Smolensk's operating balance to remain weak and fluctuate around the zero over the medium term in line with historical trend. The region's administration intends to limit operating expenditure growth to below 5% in 2015, which is well below expected inflation (Fitch forecasts 11.2%). Fitch expects that operating revenue will grow on average 5% per year in 2015-2017, supported by inflation-driven tax revenue increase and ongoing transfers from the federal budget.

In 1H15 Smolensk's tax revenue grew about 10% yoy due to higher-than-expected corporate income tax proceeds. Fitch does not expect this trend to continue amid a shrinking economy and forecasts tax proceeds to slow down in 2H15.

Fitch expects Smolensk to record a deficit before debt variation of about 10% of total revenue in 2015-2017, extending the deficit performance of prior years. Ongoing deficit is likely to fuel growth of direct risk which we expect to remain high at 90%-100% (2014: 89%) of current revenue. The region's high debt burden is compensated by its favourable structure that is dominated by subsidised non-market loans from the federal budget. These loans represented RUB14.7bn, or 57% of direct risk at end-June 2015. Fitch expects the region to continue to rely heavily on budget loans in the medium term.

Refinancing needs are concentrated in 2015-2016, when RUB18.6bn or 72% of direct risk expires. The refinancing pressure is partly mitigated by RUB11bn of maturing risk being budget loans which are likely to be rolled over by the federal government. The remaining RUB7.6bn is market debt and Fitch will monitor the ability of the region to refinance this debt on the capital market.

Smolensk's population is about one million and tends to decline. The region's economic profile is weak and its GRP per capita was 12% below the national median in 2013. Smolensk's administration expects GRP to shrink 2.3% in 2015 following the negative trend in national economy. Fitch expects the Russian economy will contract 3.5% in 2015.

RATING SENSITIVITIES
A negative operating balance coupled with growing refinancing pressure due to an increasing proportion of short-term bank loans would lead to a downgrade.

The ratings could be upgraded if the region records an operating balance sufficient to cover interest expenses on a sustained basis, accompanied by stabilisation of direct risk.