OREANDA-NEWS. Fitch Ratings has affirmed Russian Murmansk Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB-' and National Long-term rating at 'A+(rus)'. The Outlooks are Stable. The region's Short-term foreign currency IDR has been affirmed at 'B'.

The affirmation reflects Fitch's unchanged base line scenario regarding the region's budgetary performance with a sign of recovery, and gradually growing direct risk, remaining consistent with the region's ratings.

KEY RATING DRIVERS
The 'BB-' rating reflects the volatile budgetary performance with high deficit before debt in 2012-2014 that led to a rapid debt increase albeit from a low base and a concentrated economy with a developed tax base that is exposed to the economic cycle. The ratings also factor in the weak institutional framework and our expectation of a stagnant local economy following the negative national trend.

The Stable Outlook reflects our expectation of a modest recovery in fiscal performance in 2015-2017, with a marginally positive current balance and gradual narrowing of fiscal deficit.

Fitch expects the region to demonstrate faster tax recovery compared with our previous projections in early 2015. Murmank's current balance will be restored to low positive values in 2015 and remain in the positive range in 2016-2017. This is underpinned by increasing corporate income tax proceeds as the region's major export-oriented taxpayers benefit from a sharp rouble depreciation at end-2014.

Based on the budget execution in 9M15, Fitch expects the region's deficit before debt variation to reduce to 9.6% of total revenue from a high 17.9% in 2014. Deficit narrowing will mostly result from 13% increase in tax revenue and the region's strict cost control measures, which have resulted in almost zero growth of total expenditure. At 1 October, Murmansk recorded RUB1.2bn surplus. However, Fitch expects a full year deficit of RUB4.6bn (2014: deficit RUB7.9bn) due to expenditure acceleration in 4Q15.

Murmansk has recorded a continuously weak budgetary performance over the past three years. In 2014, its operating margin turned negative at 1.1%, and the deficit before debt variation peaked at RUB7.9bn, following an already high average of RUB6bn in 2012-2013. The deterioration was mostly due to stagnating tax revenues amid growing operating expenditure.

Fitch expects direct risk to continue growing, approaching 65% in 2017, up from 45% at end-2014. Despite the expected increase, Murmansk's debt burden should remain consistent with the region's ratings. However, the expected rise in debt, coupled with the region's short-term debt profile will put additional refinancing pressure on the budget.

The region's debt profile remains fairly short-term as direct risk is dominated by bank loans with maturity of between one and three years. Bank loans accounted for 80% of direct risk at 1 October 2015, and the remainder were loans from the federal budget. Murmansk needs to repay almost all outstanding debt by end-2017. Fitch assumes the region will roll over maturing budget loans, while the maturing bank loans are likely to be refinanced by the same banks or by new loans from the federal budget.

The regional economy has a strong industrial base as Murmansk is home to several natural resource extracting companies. This provides an extensive tax base for the region's budget, with tax revenue representing 82% of operating revenue in 2014. However, a large portion of tax revenues depends on companies' profits, resulting in high revenue volatility. In 2012, corporate income tax proceeds fell sharply and remained low in 2013-2014 due to weak earnings at major local taxpayers following price declines for key commodity exports.

RATING SENSITIVITIES
Improvement in budgetary performance leading to a debt coverage ratio (direct risk to current balance) below 10 years on a sustained basis would lead to an upgrade.

Inability to balance the operating budget and an increase in direct risk around 90% of current revenue would lead to a downgrade.