OREANDA-NEWS. January 26, 2016. Fitch Ratings has affirmed Russian Ryazan Region's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'B+' with Stable Outlook, Short-term foreign currency IDR at 'B' and National Long-term rating at 'A(rus)' with Stable Outlook. The region's outstanding senior unsecured domestic bonds have been affirmed at Long-term local currency 'B+' and National Long-term 'A(rus)'.

The affirmation reflects Fitch's view that Ryazan's direct risk will remain stable and its fiscal performance will be satisfactory in the medium term.

KEY RATING DRIVERS
The 'B+' rating reflects the region's high debt and weak Russia's institutional framework. It also reflects satisfactory fiscal performance amid stable economic prospects.

In its base case scenario Fitch expects Ryazan to record satisfactory fiscal performance in 2016-2018. Over the medium term we expect operating surplus of 6%-7% of operating revenue, sufficient to cover interest payments. Our forecasts are based on the region's resilient tax base - which should bring an operating revenue increase of 5% yoy in 2016 - and on continued operating spending (opex) restraint.

Based on preliminary 2015 full-year statements we estimate deficit before debt variation at close to last year's level of 6% of total revenue (2013: deficit 18%), underpinned by spending optimisation. The region's financials for 2015 will be finalised in February 2016.

Fitch expects the region's direct risk to stabilise at 75% of current revenue in 2015-2016. The region's administration managed to contain direct risk at RUB26.8bn by end-2015 (2014: RUB26.9bn), in line with our expectations. At end-2015 debt stock was 50% composed of bank loans, followed by federal budget loans (43%) and domestic bonds (7%).

Ryazan's debt servicing ratio remains weak, with direct debt servicing estimated to have exceeded almost 4x operating balance in 2015. Additionally we estimate 2015 debt payback period to have been over 35 years, which is substantially more than the average maturity of the region's debt portfolio of 2.5 years. Therefore the region remains exposed to moderate refinancing risk as 66% of its debt maturities are in 2016-2017.

The region's latest forecast sees the local economy growing 1%-2.5% annually in 2016-2018. According to the administration's preliminary estimates, the local economy contracted by 0.9% yoy in real terms in 2015 after it expanded 1.7% a year earlier. The region's economy is modest in the national context but is fairly diversified and local producers benefit from the region's close proximity to Moscow, the country's largest market.

Russia's institutional framework for local and regional governments is a constraint on the region's ratings. It has a shorter track record of stable development than many of its international peers. Weak institutions lead to lower predictability of Russian LRGs' budgetary policies, which tend to be shaped by the federal government's continuous reallocation of revenue and expenditure responsibilities within government tiers.

RATING SENSITIVITIES
A positive rating action could result from an improvement of the region's fiscal performance, leading to a smaller budget deficit consistently below 5% of total revenue and improved debt coverage ratio (as measured by direct risk/current revenue) of less than 70% on a sustained basis.

Increased total indebtedness with net overall risk above 90% of total revenue, accompanied by persistent refinancing pressure and a negative current balance, would lead to a downgrade.