OREANDA-NEWS. September 15, 2015. Fitch Ratings has revised Russian Penza Region's Outlook to Stable from Positive and affirmed its Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB', National Long-term rating at 'AA-(rus)' and Short-term foreign currency IDR at 'B'.

The revision of Outlook reflects lower-than-expected growth of tax proceeds during 7M15 amid a persistently difficult economic environment in Russia. The Stable Outlook reflects Fitch's expectation that the region will continue to record stable operating balance and moderate direct debt that is commensurate with 'BB' ratings.

KEY RATING DRIVERS

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

HIGH

Fitch expects the operating balance to be at 8%-10% of operating revenue in 2015-2017, which is below our previous expectations of 12%-13%, but still in line with the ratings. The weaker results are due to slower growth of tax collection proceeds during 7M15 amid the sluggish national economy. Collection of the region's main taxes, which are personal income tax and corporate income tax, is currently behind the schedule. Fitch projects the region's tax revenue will grow by a modest 4% in 2015, well below the region's forecast of 12%.

Fitch assumes the deficit before debt will be moderate over the medium-term at no more than 4% of total revenue in 2015 (2014: 2%). This will be supported by strong control over operating expenditure and limited capital spending. Fitch expects capital expenditure will decline to an average 14% of total spending annually in 2015-2017, from 26% in 2013-2014.

MEDIUM
Penza's economy is historically weaker than the average Russian region with GRP per capita at 75% of the national median in 2013. This has led to a weaker tax capacity than its regional peers. Federal transfers constitute a significant proportion, averaging 40% of operating revenue annually in 2010-2014, which limits the region's revenue flexibility. Fitch views the federal government's ability to provide additional support in the form of transfers to compensate for tax revenue decline as limited, due to the current negative financial and economic environment. Fitch expects national GDP to decline 3.5% in 2015.

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

Fitch expects direct risk will remain moderate at below 60% of current revenue in 2015-2017 (2014: 55%). As of 1 August 2015 the region's direct risk composed of bank loans and federal budget loans amounted to RUB21bn, little changed since the beginning of the year. Subsidised budget loans constitute around half of total direct risk, and their 0.1% annual interest rates allow the region to save on interest payments.

Fitch views positively the smooth amortisation profile of the region's direct risk, which puts Penza in a more favourable position compared with regional peers in terms of refinancing pressure. However, as with most Russian regions, the debt maturity profile of Penza is shorter than international peers'.

Penza has no repayments of market debt for the rest of 2015, and has to refinance only RUB2.1bn of budget loans. The budget loans will be refinanced by the RUB2.3bn new budget loans that Penza will receive from the federal government in 3Q15-4Q15. Fitch considers that the amount of budget loans provided by the federal government could be lower in 2016-2017, which would force the region to rely more on market debt and in turn lead to increasing cost of borrowing.

RATING SENSITIVITIES
Sharp deterioration of budgetary performance leading to an operating margin below 5%, coupled with an increase in direct risk above 60% of current revenue, could lead to a downgrade.

A sustainable operating balance at 15% of operating revenue and stabilisation of direct risk at around 50% of current revenue accompanied by a Russian economic recovery could lead to an upgrade.