OREANDA-NEWS. Fitch Ratings has affirmed the Russian Novosibirsk Region's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-', Short-term foreign currency IDR at 'F3' and National Long-term rating at 'AA+(rus)'. The Outlooks on the Long-term IDRs are Negative and the Outlook on the National Long-term rating is Stable.

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

The affirmation reflects Fitch's unchanged baseline scenario regarding the region's budgetary performance. The Negative Outlook reflects the deterioration of the national economic environment and pressure from the sovereign rating (BBB-/Negative), which place a strain on the region's credit profile.

KEY RATING DRIVERS
The affirmation reflects the region's moderate direct risk, a well-diversified economy and its recovering operating performance in line with Fitch's base case scenario. The ratings also factor in continuous debt growth and increasing pressure on debt servicing metrics.

Fitch expects the operating balance will continue to improve to RUB10bn-12bn, or around 10% of operating revenue in 2015-2017, supported by moderate revenue growth and continued control over operating expenditure. In 2014, the operating margin improved to 5.1% (2013: 4.4%), which was in line with Fitch's forecast.

Fitch expects the budget deficit before debt to narrow to 7%-8% of total revenue in 2015 (2014: negative 12%) and further to 3%-4% in 2016-2017, supported by capex limitation. The region plans to complete on-going projects and has no intention to initiate new ones. It has also decided to postpone the implementation of large infrastructure projects such as the expansion of underground lines and the construction of the fourth bridge over the Ob' river to improve transport connectivity.

Fitch expects direct risk will remain moderate over the medium term, at below 45% by end-2017 (2014: 37.8%). Nevertheless, increased cost of debt on the domestic capital market and liquidity squeeze could put pressure on the region's debt servicing metrics. Fitch expects interest payments to increase by 1.5x in 2015. Debt payback (direct debt/current balance) is expected to remain stable after a one-off deterioration in 2014 to nine years (2013: 5.6 years).

Pressure on interest payments is mitigated by the region's use of short-term subsidised loans from the federal treasury aimed at liquidity replenishment within the year. As of 1 September 2015, the region had no repayments on bank loans and issued debt until the year-end, but had to refinance RUB7.6bn of treasury loans. This is covered almost 3x by unused revolving credit lines with maturity of up to five years. Fitch expects the region will draw down funding from banks at year-end when short-term treasury loans become unavailable. This will help the region to save on interest payments.

The regional economy is well-diversified across sectors and companies, which supports the region's wealth metrics being above the national median. Gross regional product (GRP) per capita was 114% of the national median in 2013 and the average salary was 6% above the national median in December 2014. GRP increased 1.3% yoy in 2014, outpacing national growth of 0.6%. Fitch projects national GDP to decline 4% in 2015, which could negatively affect the region's economic performance.

RATING SENSITIVITIES
Consistently weak budgetary performance leading to a deterioration of debt coverage above 10 years or a sovereign downgrade would lead to negative rating action.