OREANDA-NEWS. Fitch Ratings has assigned Russia's Mordovia Republic Long-term foreign and local currency Issuer Default Ratings (IDRs) of 'B+' and a Short-term foreign currency IDR of 'B'. The agency has also assigned the region a National Long-term rating of 'A-(rus)'. The Outlooks on the Long-term ratings are Stable.

The republic's senior unsecured debt has also been assigned a Long-term local currency rating of 'B+' and a National Long-term rating of 'A-(rus)'.

KEY RATING DRIVERS
The 'B+' ratings reflect Mordovia's volatile operating performance and high direct risk, resulting from large capital expenditure that is partly mitigated by significant exposure to long-term preferential budget loans. The ratings also consider our expectation that the republic will continue to receive support from the federal government over the medium term ahead of hosting the world football championship FIFA 2018 as its own financial flexibility will remain weak.

The rating action reflects the following rating drivers and their relative weights:

High:

High Direct Risk
Fitch projects that the republic's direct risk will remain high at 130%-140% (2015: 121%) of current revenue over the medium term. Mordovia has the highest debt among the Russian regions rated by Fitch. Direct risk increased fourfold during 2010-2015 to reach RUB34.7bn last year. The growth was fuelled by high capital expenditure linked to infrastructure modernisation and the construction of sport facilities for the Mordovian national event in 2012 and the world football championship FIFA in 2018.

In mitigation, 55% of direct risk at end-2015 (RUB18.9bn) was long-term budget loans that the federal government provided to the republic at a preferential 0.1% interest rate. Fitch expects that Mordovia will continue to receive support from the state over the medium term and the federal government has already approved RUB4bn budget loans for the republic in 2016. In 2015, the federal government extended the maturity of RUB7.1bn road-related budget loans to 2025-2034 from 2015-2016.

The republic's refinancing needs are concentrated in 2018 when RUB12.7bn or 37% of direct risk (as of 1 January 2016) will mature. In 2016, the republic needs to repay RUB4.5bn, or 13% of its direct risk. The risk is mitigated by RUB2.3bn undrawn credit lines and contracted budget loans. In 2016, the republic also plans to issue RUB5bn bonds to fund its remaining financing needs.

Weak Institutional Framework
Fitch views the region's credit profile as being constrained by the evolving nature of Russia's institutional framework for local and regional governments (LRGs). It has a short track record of stable development compared with many of its international peers. Unstable intergovernmental set-up leads to lower predictability of LRGs' budgetary policies and hamper long-term development plans. The republic's budgetary performance, in particular, is reliable on support provided by the upper-tier of government.

Medium:

Weak Fiscal Performance
Fitch forecasts that Mordovia's operating performance will be weak over the medium term, with an operating balance at 4% of operating revenue (2015: 7%) and a negative current balance due to growing interest payments. We forecast the republic's fiscal deficit to narrow to 10%-12% (2015: 26%) in 2016-2017 and 5% in 2018, due to completion of infrastructure projects.

In 2015, the republic's extremely high RUB8.7bn deficit was additionally fuelled by RUB2.6bn budget loans that Mordovia lent to its municipalities. These loans have a three-year maturity and their repayment will contribute to a narrowing of the deficit in 2018.

Modest Economy
In 2015, Mordovia's economy was estimated by the republic's government to have grown 3.6% while the national economy contracted 3.7% (Fitch estimation). The growth was supported by a developing agricultural sector and FIFA championship-related construction. Nevertheless, we expect that the region's tax capacity and wealth metrics will remain modest. Its GRP per capita was 30% below the national median in 2013 (the latest available data).

Federal transfers constitute a significant proportion of Mordovia's budget, averaging about 50% of total revenue annually in 2011-2015, which limits the region's revenue flexibility.

RATING SENSITIVITIES
Sustainable improvement in the operating balance towards 10% of operating revenue leading to a strengthening of the debt payback (direct risk to current balance) towards 20 years (2015: 58 years), could lead to an upgrade.

Continuous growth of direct risk above Fitch projections (140% of current revenue), accompanied by an increase of the republic's refinancing pressure and a negative operating balance, would lead to a downgrade.