OREANDA-NEWS. Fitch Ratings has revised Russian Republic of Komi's Outlook to Negative from Stable 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'.

Fitch has also affirmed the region's senior unsecured domestic bonds' Long-term local currency rating at 'BB' and National Long-term rating at 'AA-(rus)'.

The revision of Outlook reflects Fitch's expectation that the republic's current balance will not be restored to surplus amid a persistently difficult economic environment in Russia and will in turn lead to further debt growth over the medium term.

KEY RATING DRIVERS

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

HIGH

Fitch no longer expects the republic to restore its current balance within the next two years, which is likely to remain in negative territory during this period (2014: -6%). Fitch expects tax revenue to stagnate over the medium term amid the economic downturn. The completion of major gas pipeline construction projects has had a negative impact on personal income tax proceeds through lower employment. Corporate income tax collection is also decelerating due to a weakened economy, although for oil&gas companies this is partly offset by the depreciation of the rouble as some of their costs are based in local currency.

Fitch forecasts Komi's budget deficit to remain substantial, at above 10% of total revenue in 2015-2017. This will likely increase debt to above 60% of current revenue by end-2015 and possibly 75% by end-2017. During 8M15 Komi's direct risk further increased to RUB34.6bn from RUB28bn at end-2014, following the issue of a RUB5bn bond (RUB11bn registered).

In Fitch's view Komi's exposure to refinancing risk is exacerbated by volatile interest rates in domestic markets. As of 1 September 2015, 56% of direct risk is due in 2015-2016, which may put additional stress on the republic's debt servicing over the medium term. Immediate refinancing needs by end-2015 (RUB9.4bn, or 27% of direct risk) are covered by RUB8.4bn open credit lines and RUB3bn cash reserves accumulated by Komi as of 1 September 2015.

Fitch expects the proportion of subsidised budget loans to double by end-2015 to 23% of direct risk (2014: 11%), which Fitch views positively. This is because budget loans have marginal 0.1% interest rates and lead to reduced interest payments. Komi contracted RUB10bn budget loans for 8M15.

MEDIUM

Komi has a strong economy and its gross regional product per capita exceeded the national median by more than 2x in 2013. The republic's economy is weighted towards the natural resources sector, which exposes the region to commodity prices fluctuation and potential changes in fiscal regulation.

The top 10 taxpayers contributed about 50% of the republic's consolidated tax revenue in 2014. The list of major taxpayers includes PJSC LukOil (BBB-/Negative/F3), PJSC Gazprom (BBB-/Negative/F3), and Rosneft.

Fitch forecasts the Russian economy to shrink 4% in 2015, due to weak oil prices and sanctions imposed by the US and EU. Komi's government forecasts the local economy to shrink 2.5% in 2015.

RATING SENSITIVITIES
Growth in direct risk to above 70% of current revenue, coupled with negative operating balances on a sustained basis and a reduced capacity to obtain affordable funding for its debt refinancing needs, will lead to a downgrade.