OREANDA-NEWS. Fitch Ratings has affirmed the Russian Mari El Republic'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 republic's National Long-term rating at 'AA-(rus)' with Stable Outlook. Mari El's outstanding senior unsecured domestic bonds have been affirmed at 'BB' and 'AA-(rus)'.

The affirmation reflects our unchanged baseline scenario regarding the republic's ability to record satisfactory fiscal performance and maintain moderate direct risk commensurate with its ratings in the medium term.

KEY RATING DRIVERS

The 'BB' rating reflects the republic's moderate direct risk with limited exposure to refinancing risk and satisfactory fiscal performance. The ratings also factor the republic's modest economic profile amid a deteriorating macroeconomic environment in Russia.

Fitch expects Mari El to continue posting stable fiscal performance in 2015-2017, with an operating surplus of 8%-9% (2014: 7%). This will be driven by prudent management aimed at cost control and an expected steady increase in operating revenue of 5% over the medium term. The latter would be driven by modest growth of tax revenue from processing industries.

The republic's interim deficit before debt variation narrowed to 1.4% of total revenue by end-8M15 from 9.5% a year earlier. We expect the full year deficit to remain below 10% of total revenue over the medium term (2014: 9.6%), driven by an expected reduction in capex to 13% of total spending (2010-2014: average 22%).

Fitch expects Mari El's direct risk to increase up to RUB13bn in 2017, driven by budgeted deficits, while in relative terms to stabilise at below 60% of current revenue in 2015-2017 (2014: 47%). The republic's direct risk increased to RUB10.7bn in 2014 from RUB8.7bn a year earlier. The region's debt profile shifted last year to include a larger proportion of budget loans of 42% of debt stock (2013: 13%).

Fitch does not expect the proportion of direct debt (bank loans and bonds) in the republic's debt stock to exceed 40% of current revenue by 2017, partially offsetting increased costs of borrowing due to interest rate volatility. The increased use of federal budget loans to refinance matured bonds and bank loans in 2015 is positive for the credit profile, by allowing the region to limit growth of direct debt and save on debt servicing (budget loans carry 0.1% interest per annum).

Exposure to refinancing risk is moderate. Refinancing needs are limited to the repayment of domestic bonds totalling RUB1.4bn coming due in October and December 2015. This is offset by RUB1.3bn worth of federal budget loans, received in September 2015, to repay maturing debt obligations.

Mari El's interim cash position improved to RUB675m at end-8M15 from RUB111m in 2014. The republic maintains sufficient cash balances to cover occasional cash mismatches. Interim liquidity is also supported by the use of short-term treasury loans at subsidised rates.

Mari El's socio-economic profile is historically weaker than the average Russian region. Its per capita gross regional product was 30% lower than the national median in 2012-2013, which is exacerbated by a weak economic environment in Russia. The republic's government in its restated macro-economic forecast expects economic growth of 2.4%-2.9% in 2015-2017, against 3%-3.5% previously.

RATING SENSITIVITIES

The ratings could be positively affected by an improved budgetary performance leading to deficit before debt decreasing below 5% of total revenue, coupled with an extension of the debt maturity profile.

Conversely, a downgrade or revision of the Outlook to Negative could result from sustained deterioration of operating performance with an operating margin below 5%, coupled with weaker debt coverage (2013: eight years) exceeding average debt maturity (2013: four years) over the medium term.