OREANDA-NEWS. Fitch Ratings has affirmed the Russian Tula 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 ratings are Stable.

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 view that despite a moderate deterioration of Tula's budgetary performance it will remain commensurate with the ratings. The operating balance will remain sufficient to cover annual interest payments, and direct risk remains moderate.

KEY RATING DRIVERS
The ratings reflect Tula's low direct risk and sustainably positive current balance. They also reflect the region's average-sized economy and deterioration of the national economic environment, which will put pressure on Tula's budgetary performance over the medium term.

Fitch expects the region's budgetary performance will moderately deteriorate over the medium term, with an operating balance around 6% of operating revenue during 2016-2018. This is weaker than our previous projection of operating balance averaging 10% and reflects the supressed tax revenue already in 2015 and onward. Weaker tax revenue reflected the deteriorating financial results of local companies due to a sluggish national economy in 2015 and Fitch does not expect a fast recovery in the medium term.

Fitch projects the region will control the budget deficit before debt at around 3%-5% of total revenue per year in 2016-2018 through limiting capex and continuing cost-efficiency measures. The budget deficit before debt variation narrowed to 0.9% of total revenue in 2015 from a 3.3% a year before, supported by a cut in capital outlays.

Tula's direct risk will remain moderate over the medium term at below 35% of current revenue (in 2015: 27.1%). As of 1 January 2016, direct risk totalled RUB15.9bn, unchanged from the previous year. A modest deficit of RUB0.6bn in 2015 was covered solely by outstanding cash, so the region contracted new debt only for refinancing maturing debt in that year. At 1 March 2016, the debt portfolio was almost equally split between issued debt accounted for 49% of total direct risk and budget loans from the federal budget (51%) at subsidised interest rate from 0.100% to 4.125%, which reduces interest expenditure.

Immediate refinancing risk is moderate as the region's outstanding RUB2.25bn bonds due in 2016 are covered by RUB1.8bn available bank credit facilities and RUB4bn standby short-term credit facilities from the Russian Treasury.

The regional economy has a well-diversified processing industry and economic growth that has outpaced the national average for four years in a row. According to preliminary data, in 2015 the regional economy grew 2.4%, in contrast to the national GRP decline of 3.7%. Fitch projects the national economy will contract by 1.5% in 2016, which could have negative repercussions for the region's economy. Nevertheless, the region's economy remains moderate in the national context, with GRP per capita at 88% of the national median in 2013.

Tula's credit profile remains constrained by the weak institutional framework for Russian LRGs, which 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.

RATING SENSITIVITIES
A sound budgetary performance with an operating balance sustainably above 10% of operating revenue, accompanied by moderate direct risk below 40% of current revenue would lead to an upgrade.

Conversely, deteriorated budgetary performance with an operating margin consistently below 5% accompanied by weak debt payback exceeding 10 years (2015: 3.1years) could lead to a downgrade.