OREANDA-NEWS. Fitch Ratings has affirmed Russian Republic of Komi's Long-term foreign and local currency Issuer Default Ratings (IDRs) 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 republic's outstanding senior unsecured debt ratings have been affirmed at 'BB' and 'AA-(rus)'.

The Negative Outlook reflects the republic's weakened fiscal capacity, and large running budget deficits with low prospects of then current balance being restored to surplus over the medium-term. It also factors in continued direct risk growth and high refinancing pressure. A continuing difficult economic environment in Russia increases the risk of further debt growth of the republic.

The rating affirmation reflects the region's weak fiscal performance in 2015 in line with Fitch's base case scenario and stabilisation of Komi's direct debt, due to support from the federal government in the form of low-cost budget loans in 2015-2016.

KEY RATING DRIVERS
The ratings reflect Komi's weak budgetary performance and moderate direct risk. The ratings also take into account the republic's sound economy that is dominated by the oil and gas sector, which provides the region with a developed tax base. However, it also exposes the region to potential changes in the fiscal regime and business cycle or price fluctuations in the oil and gas sector.

Fitch projects the republic's current balance to remain consistently negative at about 5% of current revenue in 2016-2018 (2015: -6.3%) due to weak operating performance and growing interest payments. In 2015, operating deficit slightly narrowed to 2.6% of operating revenue (2014: -3.3%), supported by large 40% growth of property tax revenue offset flat corporate and personal income tax revenue. The property tax increase was a result of an expanded tax base, mostly due to gas pipeline construction, and a gradual increase in tax rates.

Fitch forecasts deficit before debt variation to average 10% of total revenue in 2016-2018, below the high 19%-24% seen in 2013-2014, as the regional government focuses on spending rationalisation and cost control to reduce new borrowings. Nevertheless, deficit is likely to remain large since the region's flexibility for both operating and capital expenditure remains limited; capital expenditure accounted for only 8% (2014: 11%) of total expenditure in 2015. These factors could lead direct risk to rise above 70% of current revenue, which will not be commensurate with the region's 'BB' rating.

We project direct risk to reach RUB40bn (2015: RUB33bn), or 68% (2015: 61%) of current revenue by end-2016 and further increase to 80% by end-2018. In 2015, direct risk increased RUB5.1bn, fuelled by a persistent deficit. Positively, this growth was mostly in low-cost budget loans. The federal government substantially extended its support to Komi in 2015, allowing the region to stabilise direct debt at 46% in 2015 (2014: 47%). This support has continued so far in 2016 with a RUB4.7bn budget loan approved for Komi to refinance part of its maturing debt.

Komi is exposed to high refinancing risk as it needs to repay 35% (RUB11.5bn) of its direct risk in 2016. Fitch expects most maturities to be financed through budget loans and the use of available undrawn credit lines (currently RUB8.4bn). Additional liquidity may come from RUB7.2bn bonds that Komi plans to issue in 2016. In Fitch's view, the republic has adequate access to market funding. However, volatile market interest rates may put further stress on its current balance. The republic has well-diversified debt portfolio, which at end-2015 was composed of bonds (63%), followed by budget loans (24%) and bank loans (13%).

The republic's credit profile remains constrained by the weak institutional framework for Russian local and regional governments (LRGs), which has a shorter record of stable development than many of its international peers. Weak institutions lead to lower predictability of Russian LRGs' budgetary policies, which are subject to the federal government's continuous reallocation of revenue and expenditure responsibilities within government tiers.

Komi's economy is sound, with gross regional product (GRP) per capita exceeding the national median by more than 2x in 2013. The republic has a well-developed tax base; taxes contribute about 85% of region's operating revenue. However, the economy is concentrated in the natural resources sectors, which exposes the region to commodity price fluctuation and potential changes in fiscal regulation. The top 10 taxpayers contributed about 50% of the republic's consolidated tax revenue in 2015.

The republic's GRP is estimated by Komi's government to have decreased 2.8% yoy in 2015, which is slightly better than the wider Russian economy (-3.7%) as growing oil extraction activity offset declining construction and trade output. Fitch projects national GDP will contract 1.5% in 2016, and the republic of Komi will likely follow this negative trend.

RATING SENSITIVITIES
Growth in direct risk to above 70% of current revenue, coupled with negative operating balances on a sustained basis and a reduced capacity to obtain affordable funding for its debt refinancing needs, will lead to a downgrade.