OREANDA-NEWS. December 16, 2015. Fitch Ratings has affirmed Russia's Altai Region's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB+', National Long-term rating at 'AA(rus)' and its Short-term foreign currency IDR at 'B'. The Outlooks on the Long-term IDRs and National Rating are Stable.

The affirmation reflects Fitch's unchanged baseline scenario regarding Altai region's stable budgetary performance, low debt, and its satisfactory liquidity.

KEY RATING DRIVERS
The 'BB+' rating reflects the region's net cash positive status, its satisfactory budgetary performance and low indebtedness. The ratings also take into account the modest size of the region's economy and the depressed macro trend for Russia in 2016-2017, which could negatively influence the region's financials in the medium term.

Fitch expects Altai to continue its prudent fiscal management, leading to maintenance of a stable budgetary performance, with operating surpluses around 6%-8% in 2015-2017 (2014: 7.6%) with close to balanced budgets. The region recorded an interim surplus of 4.7% before debt variation by end-9M15, after it posted a minor deficit before debt variation of 1% of total revenue in 2014, driven by capex financing.

We expect the region to maintain its low debt position in the medium term. Subsidised federal budget loans remain the sole debt instruments since 2007, with final maturities in 2034. Despite an expected gradual increase in the region's direct risk to up to RUB10bn in 2016-2017 (2014: RUB2bn), Altai's debt is likely to remain low by both national and international standards, representing less than 10% of expected 2017 current revenue.

Altai region has been net cash positive since 2009, with interim cash reserves growing to RUB6.5bn at October 2015 (2014: RUB4bn). This sound cash position fully offsets the region's budgeted deficit in 2015 and provides a buffer against potential volatility in the Russian capital markets, which otherwise would negatively affect Altai's liquidity.

We expect Altai to continue administering conservative fiscal practices leading to close to balanced budgets in the medium term with a minor deficit before debt variation of about 1% of total revenue expected in 2015, with potential for minor surpluses in 2016-2017.

The region's contingent liabilities are limited to a single outstanding guarantee (for a negligible RUB8.7m) and the low indebtedness of its public-sector companies. In Fitch's view, the administration's oversight of its public sector companies is adequate, limiting the region's exposure to material contingent risk.

Fitch considers the region's economy as weak by international standards due to low per capita wealth metrics. Altai's 2013 gross regional product (GRP) was RUB171,600 (USD5,600), which is 35% below the national median stated per capita. This is in part attributed to the concessional taxation of agriculture, which largely relies on in-kind exchanges that is not captured in tax accounts and official statistics.

In its restated forecast the region's administration expects economic growth of 1%-3% per year in 2015-2018, which in Fitch's view may be optimistic, given the expected contraction in Russia of 4% yoy for 2015. According to the administration's preliminary estimates, Altai's GRP expanded 0.9% in 2014.

RATING SENSITIVITIES
A downgrade could result from significant deterioration in operating performance, coupled with a radical increase in the region's total risk.

Positive rating action is unlikely in our base line scenario, considering the worsened economic environment and low prospects for a swift recovery in Russia.