OREANDA-NEWS. November 17, 2015. Fitch Ratings has affirmed the Russian Kursk Region's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB+', Short-term foreign currency IDR at 'B' and National Long-term rating at 'AA(rus)'. The Outlooks on the Long-term ratings are Negative.

The affirmation reflects Fitch's unchanged baseline scenario regarding Kursk region's budgetary performance and moderate debt. The Negative Outlook reflects the volatility of the region's performance amid the adverse macroeconomic environment and the risk that the region could not restore its operating balance to its historically sound values over the medium term.

KEY RATING DRIVERS
The ratings reflect the region's moderate direct risk and a track record of sound operating performance. The ratings also take into account the moderately developed regional economy and slowdown of the national economy, which put pressure on the region's budgetary performance.

Based on 9M15 budget execution, Fitch expects the region's operating balance to return to positive territory in 2015 after falling to negative 2.4% of operating revenue in 2014. Fitch projects the operating balance will account for 3%-5% in 2015-2017, well below its strong 20% in 2010-2012. The modest restoration will be supported by dynamic operating revenue (both taxes and current transfers) accompanied by continuous control of operating spending growth.

Fitch expects the region's direct risk to increase towards 35% by the end-2017 (2014: 23%) due to an on-going deficit before debt which will account for 4%-5% of total revenue over the medium term. As of 1 November 2015, Kursk was free from market debt (bank loans and issued debt). Fitch expects that closer to the year-end the region will utilise up to RUB3bn bank credit lines (out of RUB12bn contracted) to fund the expected budget deficit, while budget loans will remain at RUB6.1bn.

Fitch projects the proportion of budget loans will increase to around 60% of total direct risk by end-2015 versus only 23% one year before. In 2015, the region received RUB4.6bn loans from the federal government at 0.1% annual interest rates with maturity in 2018. The enhanced reliance on budget funding will help the region to save on interest payments over the medium term.

Fitch expects the region's refinancing risk will be moderate in 2015-2017. As of 1 November 2015, Kursk had no repayments until 2017, when it has to redeem RUB0.2bn budget loans comprising only 3% total direct risk. In 2015, the administration contracted two- and three- year bank credit lines that allow the region to lengthen and even out its debt maturity profile as historically, Kursk has relied on one-year bank loans.

During 2011-2014, the region's economic growth outpaced the national average. In 2014, gross regional product (GRP) increased by 5.5% yoy (national growth: 0.6%) supported mostly by agriculture and energy production. Nevertheless, the region's economy is still modest, with GRP per capita 8% lower than the national median in 2013. Fitch forecasts a 4% decline of national GDP in 2015 and assumes this could negatively influence the region's economic performance.

RATING SENSITIVITIES
The inability to restore the operating margin amid debt growing towards 50% of current revenues accompanied by high refinancing pressure could lead to a downgrade.