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

The affirmation reflects Fitch's unchanged baseline scenario regarding Tambov's stable budgetary performance, moderate direct risk and growing economy amid a national economic downturn.

KEY RATING DRIVERS
The ratings reflect the region's solid operating performance, high cash balance, moderate, albeit increasing, direct risk and high refinancing pressure. The ratings also factor in the modest size of the economy, resulting in reliance on transfers from the federal budget.

Fitch projects stable budgetary performance for Tambov in 2015-2017 with an operating margin of 10% (2014: 10.5%) and a deficit before debt variation of 5% of total revenue (2014: 5%). This will be supported by expansion of the region's tax base and steady flow of transfers from the federal budget. Tax revenue is likely to grow 5%-7% pa over the medium term due to the development of the agricultural sector and processing industry.

Fitch projects Tambov's self-financing capacity will remain strong in 2015-2017. About 80% of capex will be funded by the region's current balance and capital transfers from the federal government. A substantial part of the transfers is earmarked for the agricultural sector to support domestic food production amid a lasting embargo on imported food products. The remaining 20% of capex will be funded by the region's cash balance and new borrowings that will fuel modest growth of direct risk over the medium term.

Fitch expects the region's direct risk to remain moderate at about 40% of current revenue (2014: 32%) in 2015-2017. At 1 September 2015, direct risk amounted to RUB11.3bn (end-2014: RUB10.3bn) and comprised 63% bank loans and 37% budget loans. The latter included a RUB2.6bn short-term treasury loan that will be refinanced by market debt by year-end.

As of 1 October 2015, 45% of its direct risk will mature in 2015-2016 and another 50% is due in 2017-2018. Fitch does not expect the region to have any difficulties in rolling over its maturing debt with local banks. However, volatile interest rates on the domestic market may put pressure on its current margin over the medium term. As of 1 October 2015, Tambov had a high RUB7.1bn cash balance that Fitch views as credit- positive. The region could use some of this liquidity to refinance maturing direct risk.

Tambov's economy has been growing at a faster rate than the national economy, supported by investments in the economy. During 2011-2014 the region's cumulative growth was about 40% versus national growth of 10%. Nevertheless, Tambov's wealth metrics remain modest, and its GRP per capita was 83% of the national median in 2013. This has led to a weaker tax capacity than its regional peers. Federal transfers constitute a significant proportion of Tambov's budget, averaging about 50% of operating revenue annually in 2010-2014, which limits the region's revenue flexibility.

RATING SENSITIVITIES
A continuous budget deficit leading to growth of direct risk above 50% of current revenue, accompanied by high refinancing pressure, would lead to negative rating action.

An upgrade is unlikely given the pressure on the sovereign's IDRs (BBB-/Negative). However, direct risk declining towards 20% of current revenue and an operating margin at above 15% on a sustained basis accompanied by a Russian economic recovery, could lead to an upgrade.