OREANDA-NEWS. September 15, 2015. Fitch Ratings has affirmed the Russian Nizhniy Novgorod Region's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB', Short-term foreign currency IDR at 'B' and National Long-term rating at 'AA-(rus)'. The Outlooks on the Long-term IDRs and National Long-term rating are Negative.

The region's outstanding senior unsecured domestic bonds have been affirmed at Long-term local currency 'BB' and National Long-term 'AA-(rus)'.

The affirmation reflects Fitch's unchanged baseline scenario regarding Nizhniy Novgorod Region's budgetary performance. The Negative Outlook reflects growing direct risk accompanied by high refinancing pressure and deteriorating operating performance.

KEY RATING DRIVERS
The ratings reflect the region's satisfactory budgetary performance with a small positive operating balance, but also its ongoing budget deficit leading to debt increase. The ratings further take into account the slowdown of the national economy, which place a strain on the region's budgetary performance.

Fitch expects the region's direct risk to exceed 70% of current revenue by end-2016 due to an inability to narrow the budget deficit. The agency estimates that its deficit before debt will account for 8%-10% of total revenue over the medium-term, in line with 2012-2014 actuals. The administration plans to shrink the deficit materially in 2016 before turning a budget surplus in 2017.

Fitch does not expect the deficit to shrink meaningfully due to unfavourable macroeconomic trends hampering the revenue base, and rigid operating spending. Capital spending will be fuelled by preparations for the World Football Championship to be held in Nizhniy Novgorod in 2018. Most of the funding will come from the federal budget, but the region will be expected to co-finance several items.

Direct risk stood at RUB63.6bn as of 1 August 2015, little changed since the beginning of the year. However, the structure has shifted favourably towards a higher proportion of medium-term debt instruments. Fitch expects the share of short-term debt will decrease to 30% of direct risk by early 2016 from 44% a year before, providing some relief to refinancing pressure. At end-August 2015, after a two-year break, the region re-entered the domestic bond market with a RUB12bn 2020 bond issue.

The region remains exposed to refinancing pressure over the medium-term as 90% of the region's direct risk will mature in 2015-2017. Nearly half of its refinancing needs (RUB31bn) are for this year, but this is mitigated by available RUB30bn revolving bank credit lines protecting the region from possible hikes in interest rates for the rest of the year.

Fitch expects Nizhniy Novgorod's operating balance will shrink to 4%-6% of operating revenue over the medium-term (2013-2014: 8%) due to sluggish tax proceeds amid the national economic slowdown. At the same time the agency expects the current balance to be zero in 2015-2017, suppressed by growing interest payments, and placing the region's creditworthiness under pressure.

Nizhniy Novgorod has a diversified economy with a developed industrialised sector, which supports its wealth metrics being above the national median. The regional GRP per capita was at 107% of the national median in 2013. Fitch forecasts national GDP will contract 3.5% in 2015, close to the 3% decline expected by Nizhniy Novgorod's administration for the regional economy. This could negatively affect the region's tax collection capacity in the near-term.

RATING SENSITIVITIES
An increase in direct risk to above 70% of current revenue accompanied by inability to cope with on-going refinancing pressure or failure to maintain a sustainable positive current balance could lead to a downgrade.