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

The region's outstanding senior unsecured domestic bonds have been affirmed at Long-term local currency 'BB' and National Long-term 'AA-(rus)'.

The affirmation reflects Fitch's unchanged baseline scenario regarding Nizhniy Novgorod Region's budgetary performance. The Negative Outlook reflects growing direct risk accompanied by high refinancing pressure and deteriorating operating performance.

KEY RATING DRIVERS
The ratings reflect the region's satisfactory budgetary performance with a small positive operating balance, but also its ongoing budget deficit leading to debt increase. The ratings further take into account the slowdown of the national economy, which places a strain on the region's budgetary performance.

Fitch expects Nizhniy Novgorod's operating balance will stabilise at a low 5%-6% of operating revenue over the medium-term (down from an average 8.8% in 2011-2015) due to sluggish tax proceeds amid the national economic slowdown. At the same time the agency expects a current balance of close to 1% in 2016-2018, weighed down by growing interest payments, and placing the region's creditworthiness under pressure.

According to Fitch's baseline scenario, the region's direct risk will increase towards 70% of current revenue in 2016-2017 and stabilise at this level due to likely cuts in capex after the commissioning of major projects for Football World Cup 2018. The agency estimates that the region's deficit before debt will narrow to 3%-4% by 2018, from 7.5% in 2015.

In 2015 direct risk grew to RUB73.2bn (12% increase yoy) or 63.5% of current revenue as of 1 January 2016. However, the structure has shifted favourably towards a higher proportion of medium-term debt instruments, ie average maturity improved to 2.4 years in 2015 from 1.9 years in 2014. The region has also managed to switch half of its bank debt to two-year loans, easing refinancing pressure. At end-August 2015, after a two-year break, the region re-entered the domestic bond market with a RUB12bn 2020 amortising bond issue.

The region remains exposed to refinancing pressure over the medium-term as 83% of the region's direct risk will mature in 2016-2018. As of 1 February 2016 the region's refinancing needs for this year stood at RUB21.9bn (31% of outstanding debt), but this is mitigated by RUB26bn available revolving bank credit facilities and RUB8.5bn standby short term credit facilities from the Russian Treasury.

The region's credit profile remains constrained by a weak institutional framework for Russian LRGs. The latter has a shorter record of stable development than many of its international peers. The predictability of Russian LRGs' budgetary policy is hampered by frequent reallocation of revenue and expenditure responsibilities between tiers of government.

Nizhniy Novgorod has a diversified economy with a fairly well-developed industrialised sector, supporting wealth metrics near the national median. The region is among the top 15 Russian regions in gross regional product (GRP) volume and has a population of 3.3 million people (1.7% of Russia's). GRP fell 3% 2015, which is slightly better than the wider Russian economy (-3.7%) due to firm performance of the steel sector.

Additionally, the region benefits from increased military spending as it hosts the sector's production facilities (nuclear naval reactors for submarines and icebreakers, missile and artillery systems, etc.). Fitch forecasts national GDP will contract 1.5% in 2016, and that Nizhniy Novgorod will likely follow this negative trend.

RATING SENSITIVITIES
An increase in direct risk to above 70% of current revenue accompanied by ongoing refinancing pressure or an inability to maintain sustainable positive current balance could lead to a downgrade.