OREANDA-NEWS. November 30, 2015 Fitch Ratings has revised the Russian Krasnoyarsk Region's Outlook to Negative from Stable and affirmed its Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB+'.

The agency has also affirmed the region's Short-term foreign currency IDR at 'B' and National Long-term rating at 'AA(rus)'. Krasnoyarsk region's outstanding senior unsecured domestic bonds have also been affirmed at 'BB+' and 'AA(rus)'.

The revision of Outlook to Negative from Stable reflects our changed baseline view regarding the region's fiscal performance over the medium term. We no longer expect a recovery of the region's key credit metrics in 2015-2017. Krasnoyarsk region's fiscal performance is likely to be negatively affected by Russia's prolonged economic slowdown.

KEY RATING DRIVERS

The Outlook revision reflects the following rating drivers and their relative weights:

HIGH

Fitch no longer expects Krasnoyarsk to restore its fiscal performance over the medium term. According to our updated baseline scenario the region is likely to post an operating surplus of 4%-5% against the 7%-10% expected previously. Despite an expected improvement in operating balance to RUB6bn-RUB7bn in 2015-2017 (2014: RUB3bn), it would remain insufficient to cover interest payments, leading to a consistently negative current balance.

We expect the region to post a deficit before debt variation of 8%-10% of total revenue in 2015-2017 (2014: 15%), as opposed to the previously expected 3%-5% deficit. In Fitch's view structural imbalances will likely prevail over the medium term, limiting recovery prospects. Tax revenue is unlikely to see rapid growth due to changes in fiscal regulations and a depressed macro-economic environment. Additionally, the region's operating expenditure is rigid, with current transfers and staff salaries historically averaging about 90% of operating expenditure.

Fitch expects the region to cut its capex to about 10% of total spending in the medium term, from an already lowered level of 15% in 2014 (historical average of 26% annually in 2009-2013). The region has completed most of its large-scale infrastructure development projects that were funded in 2009-2013.

In the updated scenario we expect Krasnoyarsk region's direct risk to increase above 50% of current revenue in 2015-2017 (2014: 47%). The region's direct risk in absolute terms is forecast to increase to RUB84bn by end-2015 (2014: RUB67bn). The region's debt stock as of end-October 2015 was 66% composed of domestic bonds, followed by bank loans (18%) and federal budget loans (17%). The region's debt maturity profile is stretched till 2034.

MEDIUM

Fitch expects continued pressure on the region's fiscal flexibility to persist over the medium term, despite its sound economy and increased tax capacity. This is because new fiscal regulation fails to compensate via transfers for inadequate distribution of tax revenues from the federal government.

A weak institutional framework for Russian subnationals is a constraint on the region's ratings. Frequent changes to the allocation of revenue sources and assignment of expenditure responsibilities between the tiers of government limit the region's forecasting ability and negatively affect its fiscal capacity and financial flexibility.

Krasnoyarsk region's ratings also reflect the following key rating drivers:

Macro-economic trends in Russia remain negative. In our revised forecasts we expect the economy to contract 4% in 2015 (3.5% previously), due to weak oil prices and sanctions imposed by the US and EU. Krasnoyarsk's administration in its draft 2016-2018 budget law expects the local economy to shrink 1%-2% in 2015, and sees weak growth prospects in 2016-2017.

The region's strong industrial profile supports above-national average wealth metrics, while economic prosperity is historically linked to the power generation, oil and other natural resources and non-ferrous metallurgy sectors. Recent commodity price fluctuation and changes in fiscal regulation directly affecting prime sectors have depressed the region's fiscal capacity through reduced tax revenue.

The region's taxation revenue remains concentrated in the top 10 taxpayers, which contributed 45% of consolidated tax revenue in 2013-2014. The list of major taxpayers includes PJSC MMC Norilsk Nickel (BBB-/Negative/F3), Polyus Gold International Limited (BBB-/Negative/F3), Boguchanskaya HPP, Krasnoayrsk HPP and Rosneft.

RATING SENSITIVITIES

A consistently negative current balance in the medium term, accompanied by continuous rapid growth of direct risk, could lead to a downgrade.