OREANDA-NEWS. November 18, 2015. Fitch Ratings has affirmed Russian Stavropol Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB' and National Long-term rating at 'AA-(rus)' with Stable Outlooks. The Short-term foreign currency IDR has been affirmed at 'B'.

The region's outstanding senior unsecured domestic bonds have also been affirmed at 'BB' and 'AA-(rus)'.

The affirmation reflects Fitch's unchanged baseline scenario regarding Stavropol region's satisfactory budgetary performance and moderate direct risk over the medium term.

KEY RATING DRIVERS
The ratings reflect Stavropol's sustainable operating performance and moderate, albeit growing, direct risk with high refinancing needs. The ratings also factor in the persistent capex-driven budget deficit and the region's modest economic indicators.

Fitch projects the region will record an operating balance at 6%-8% of operating revenue over the medium term (2014: 10.6%). This will be underpinned by strict control of operating expenditure amid stagnating tax revenue. Fitch projects a 3.5% tax revenue decline in 2015 and moderate growth in 2016-2017. The 2015 decline is a one-off as local corporates claim larger income tax returns from the region's budget amid the deteriorated economic environment. A modest increase in other taxes will not offset this decline.

Fitch forecasts direct risk to steadily grow towards RUB45bn by end-2017 (end-2014: RUB27.4bn) driven by continuing capex of about 18% of total expenditure. In relative terms, direct risk will not be higher than 60% of current revenue by end-2017 (2014: 39%), which in Fitch's view is still moderate in the international context and commensurate with the 'BB' rating.

Fitch notes that there is a risk the region's debt coverage (direct risk to current balance) will deteriorate to above 10 years in 2015-2017 from 4.5 years in 2014 driven by higher debt stock. Debt coverage will significantly exceed Stavropol's short weighted-average debt maturity profile of about 2.6 years at end-September 2015. Combined with the expected on-going deficit, this amplifies the region's refinancing pressure and makes Stavropol dependent on access to financial market for debt refinancing and deficit funding.

As with most Russian sub-nationals, Stavropol is exposed to high refinancing risk and about 60% of its direct risk is due 2015-2016. By end-2015, Stavropol needs to repay RUB6.6bn of maturities. Fitch expects the region to cover its immediate refinancing needs by part of undrawn RUB20.4bn one- to three-year credit lines and RUB2.7bn budget loan that the region expects to contract by year-end. In April 2015, Stavropol obtained RUB3.5bn budget loans to refinance part of the maturing market debt (bank loans and domestic bonds), which underpins Fitch's view that Stavropol would be eligible for further government support.

Stavropol's socio-economic profile is historically weaker than that of the average Russian region and is dominated by agriculture, food processing and chemistry. Its per capita gross regional product was about 65% of the national median in 2013. However, the region's economy is less dependent on the external environment, which can prove volatile. Fitch forecasts 4% contraction of national GDP in 2015, and believes the region will also face a slowdown of economic activity, albeit less than nationally.

RATING SENSITIVITIES
A sustained sound operating balance at above 10% of operating revenue and debt coverage (2014: 4.5 years) in line with the average maturity profile (2014: 2.1 years) would lead to an upgrade.

Weakening of the operating margin towards zero, coupled with an increase in direct risk well above 60% of current revenue, would lead to a downgrade.