OREANDA-NEWS. Fitch Ratings has affirmed the Russian Chuvash Republic's (Chuvashia) Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB+', Short-term foreign currency IDR at 'B' and National Long-term rating at 'AA(rus)'. The Outlooks are Negative.

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

The affirmation reflects the republic's weakened but still satisfactory budgetary performance in line with the rating since the last review. The Negative Outlook reflects Fitch's expectations of a negative dynamic in the region's economy and that debt metrics will weaken in the medium term due to growing direct risk amid continuing budget deficit.

KEY RATING DRIVERS
The rating reflects Chuvashia's moderate but growing direct risk as well as satisfactory albeit deteriorated budgetary performance. The ratings also factor in the modest size of the economy, resulting in a higher reliance on transfers from the federal budget.

Based on 9M15 budget execution, Fitch expects the republic's operating balance to decrease to 6% of operating revenue in 2015, down from 7.6% in 2014 (2013: 13.9%). The downward trend was caused by both continued pressure on opex and lower than expected tax collection amid the negative economic environment. Fitch projects the operating balance will remain at the current 6% in the medium term, below its sound average of 10% in 2010-2013.

Fitch expects Chuvashia's direct risk to increase gradually towards 50% of current revenue by end-2017 (2014: 34%) due to on-going deficit before debt, which will account for 8% of total revenue in 2015 and 4%-6% over the medium term. Chuvashia has prolonged its direct debt of RUB5.7bn by contracting federal budget loans maturing in 2018.

As of 1 December 2015, the proportion of market debt (bank loans and issued debt) had decreased to 17% of direct risk. By using up to RUB4bn bank credit lines to fund the expected budget deficit, the proportion of market debt may increase again to 38% (2014: 73%) by end-2015, and the remaining 62% will consist of budget loans. As of 1 December 2015, the republic had RUB16bn of committed credit lines that fully cover direct risk. Contingent liabilities are low and decreasing, and do not represent a significant risk at the current level.

The republic's socio-economic profile is historically weaker than the average Russian region. Its per capita gross regional product was 32% lower than the national median in 2013. Chuvashia has a diversified industry-oriented economy, which was undercut by a decrease in industrial production and investments amid national economic slowdown. The republic's administration expects local economy to contract by 5.5% yoy in 2015 and return to growth rate of about 1%-3% in 2016-2017. Chuvashia gross regional product increased by 0.1% yoy in 2014 (2013: 1.9% fall), below the national 0.6% growth in 2014.

RATING SENSITIVITIES

Sharp growth of direct risk to above 50% of current revenue, coupled with an inability to ease refinancing pressure and further deterioration of operating performance, could lead to a downgrade.