OREANDA-NEWS. January 26, 2016. Fitch Ratings has affirmed Russian Kirov Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB-' with Negative Outlooks, and its Short-term foreign currency IDR at 'B'. The agency has also affirmed the region's National Long-term rating at 'A+(rus)' with a Negative Outlook.

The Negative Outlook reflects the region's continuously growing direct risk, which is driven by a persistent budget deficit. The affirmation reflects the region's preliminary estimated 2015 annual budgetary performance being in line with Fitch's base case scenario.

KEY RATING DRIVERS
The 'BB-' rating reflects Kirov's weak operating performance with low operating balance insufficient to cover interest payments and ongoing budget deficit leading to growing direct risk.

Fitch projects Kirov's operating balance will be weak in 2016-2018 at about 2% of operating revenue and the current balance is likely to remain negative despite decreased interest payments. We expect the region could moderately narrow the deficit before debt variation towards 6%-7% of total revenue over the medium term from an average 11% in 2012-2014, driven by requirements imposed by the Ministry of Finance as a condition for granting state support to the regional government. However, Fitch considers that Kirov has low headroom for significant improvement of its fiscal performance, given its limited expenditure flexibility and high uncertainty with regards to tax revenues dynamics.

The region's financials for the 2015 fiscal year will be finalised in February 2016. Based on the preliminary 2015 full-year statement, the estimated operating balance was about 1% in 2015 (2014: 0.6%) and the current balance was about minus 1% of current revenue (2014: -2.6%). In 2015, Kirov region recorded a RUB3.3bn deficit before debt variation, which is slightly less than RUB3.5bn in 2014. In relative terms, the fiscal deficit remained at about 8% of total revenue.

Fitch forecasts direct risk to gradually grow over the medium term towards 70% of current revenue (2015: 60%) driven by the ongoing deficit. In 2015, the region's direct risk increased and reached RUB23.6bn (2014: RUB21bn). This is mitigated by the risk structure, which has substantially changed towards larger proportion of subsidised funding. At end-2015, budget loans composed 70% of direct risk (2014: 34%) as the region contracted about RUB10bn budget loans to refinance maturing bank loans.

The region's refinancing risk is moderate and almost equally spread between 2016-2017 and later. In 2016-2017, Kirov needs to repay 54% of its direct risk, which includes RUB7.2bn bank loans and RUB5.5 budget loans. We expect the region to fund its refinancing needs by rolling budget and bank loans.

The region's economic profile is weaker than the average Russian region. Gross regional product (GRP) per capita was 65% of the national median in 2013. The economy is diversified. The top 10 taxpayers contributed less than 20% of the region's tax revenue in 2014. The major taxpayers are spread across various sectors of the economy, which makes the region's tax proceeds less vulnerable to the economic cycle. The region's administration preliminary estimated that GRP contracted 4% in 2015 (2014: growth 0.8%) following the national economic trend and expects the local economy to stagnate with annual growth of 0%-1.5% pa in 2016-2018.

RATING SENSITIVITIES
Growth of direct risk above 70% of current revenue and low operating balance insufficient for interest payments would lead to a downgrade.