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

The affirmation and Negative Outlook reflect Fitch's projections of the region's weak budgetary performance and persistently high refinancing risk amid growing direct risk.

KEY RATING DRIVERS
The 'B+' rating reflects the region's material direct risk, with considerable refinancing needs concentrated during next 12 months. The ratings also factor in the ongoing fiscal deficit and below average wealth metrics of the local economy.

Fitch expects the operating performance in 2016-2018 will remain weak, with an operating balance of 2%-4% of operating revenue and a negative current balance due to high interest expenses. Sluggish tax proceeds are likely to be mitigated by the regional management's strong intention to reduce non-core operating expenditure.

According to preliminary data, the region's 2015 budgetary performance demonstrated a modest improvement compared with 2014. Despite operating revenue dropping by 2.1%, the operating balance grew to 2.7% of operating revenue in 2015, from a weak 0.2% one year earlier. This was caused by strict control of opex, which reduced by 4.6%. In Fitch's view, the region will continue the practice of fiscal austerity, and total opex will decline by a further 2% in 2016.

Fitch expects the region's direct risk to continue rising and account for 110% of current revenue by end-2016, driven by a RUB2.5bn fiscal deficit (2015: RUB2.7bn) amid sluggish operating revenue growth due to the tough economic environment. We expect the region's deficit to narrow in 2017-2018, but to still represent 10% of total revenue. Direct risk rose to RUB17.7bn or 97% of current revenue at end-2015 (2014: RUB15.9bn and 86%).

A large part of Kostroma's debt is short term, with 49% of total direct risk maturing in 2016 and the remaining outstanding debt due in 2017-2018. Fitch expects the region's current balance for 2016-2018 to be negative, leading to more capital market funding. Fitch believes the region will be able to attain the required funding in advance of the existing debt maturity dates.

Refinancing risk is partly mitigated by the region's reliance on federal budget loans, which accounted for 43% of direct risk at 1 January 2016. We believe maturing federal budget loans are likely to be rolled over.

Kostroma's tax base has historically been modest, limiting its own fiscal capacity. Fitch forecasts marginal 0.5% growth of national GDP in 2016, and believes the region will also face stagnant economic activity, which will contain tax revenue growth.

RATING SENSITIVITIES
The region's inability to curb growth of total indebtedness, accompanied by persistent refinancing pressure and a negative operating balance, would lead to a downgrade.