OREANDA-NEWS. Fitch Ratings has revised the Outlooks on the Russian Orenburg Region's Long-term Issuer Default Ratings (IDR) and National Long-term rating to Stable from Positive. The agency also affirmed the region's Long-term foreign and local currency IDRs at 'BB' and its Short-term foreign currency IDR at 'B'. The National Long-term rating has been affirmed at 'AA-(rus)'.

The Orenburg Region's outstanding senior unsecured domestic bonds of RUB9bn (ISIN RU000A0JTGE4 and RU000A0JTZK1) and JSC Orenburg Housing Mortgage Corporation's (OHMC) senior unsecured bond of RUB1.37bn (ISIN RU000A0JS3Q8), guaranteed by the region, have also been affirmed at 'BB' and 'AA-(rus)'.

KEY RATING DRIVERS
The revision of Outlook to Stable and IDRs affirmation reflect the following rating drivers and their relative weights:

High:
The revision of Outlook reflects deterioration in Orenburg region's operating performance in 2013 beyond Fitch's expectations. The region's operating surplus decreased to 0.2% in 2013 (2012: 5.8%), while its deficit before debt variation widened to 16.9% of total revenue (2012: 3.7%). This was due to increased operating expenditure and reduced tax proceeds. Fitch expects Orenburg region to gradually restore its operating surplus to 4%-6% in 2014-2016.

Fitch believes the federal government's election pledges made in 2012 to raise public sector salaries will continue to fuel growth of the region's operating expenditure in the medium term. New fiscal rules introduced in 2013, comprising advanced deprecation and the introduction of consolidated groups of taxpayers for large corporations, led to taxes falling by 2% yoy in 2013.

Russia's institutional framework for subnationals is a constraining factor for Orenburg region's ratings. Frequent changes in allocation of revenue sources and assignment of expenditure responsibilities between the tiers of government limit the region's forecasting ability and negatively affect its fiscal capacity and financial flexibility.

Medium:
Fitch expects Orenburg region's direct risk to increase moderately to 41% of current revenue in 2014 (2013: 36%) and to 45% in 2015-16 to fund expected budget deficits. Direct risk comprised 41% domestic bonds, 41% federal government loans and 18% bank loans. The region's expected payback period - as measured by direct debt/current balance - is likely to be six to seven years in the medium term.

Orenburg region's cash position weakened in 2013 as its cash was partly depleted to finance its budget deficit. Cash reserves decreased to RUB0.6bn by end-2013 from RUB2.3bn in 2012. The region maintains stand-by credit lines of up to RUB6bn.

Orenburg region's contingent risk is low and limited to several guarantees issued to local companies to promote economic development and to self-serviced debt of its public entities. The region guaranteed the domestic bond of OHMC of RUB1.37bn issued in 2012. None of the guarantees have been called by the lenders and the region is likely to issue several new guarantees in 2014-2016.

Orenburg region's ratings also reflect the following rating drivers:
The local economy is dominated by oil and gas companies, which provide a sustainable tax base. Concentration of the tax base exposes Orenburg region to potential changes in the fiscal regime or business cycles in the sector. A robust economy supports stronger-than-average wealth indicators - GRP per capita exceeded the Russian region median by 25% in 2012 - while average salary was just 10% below the median.

RATING SENSITIVITIES
The ratings could be positively affected by a sustainable debt coverage ratio of below four years of current balance and direct risk remaining below 40% of current revenue.

The ratings could be negatively affected by consistently weaker budgetary performance leading to insufficient debt service coverage of the region.