OREANDA-NEWS. Fitch Ratings has affirmed Ryazan Region's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'B+', Short-term foreign currency IDR at 'B' and National Long-term rating at 'A(rus)'. The Outlooks on the Long-term ratings are Negative.

The region's outstanding RUB2.5bn senior unsecured domestic bond issues have been affirmed at Long-term local currency 'B+' and National Long-term 'A(rus)'.

KEY RATING DRIVERS
The ratings reflect the region's high debt levels, weak debt servicing ratios and decreasing expenditure flexibility. The ratings also factor in the deterioration of the national economic environment, which put pressure on budgetary performance. The Negative Outlook reflects Fitch's expectation that the region's direct risk will further increase to about 80% of current revenue by end-2015.

The federal government's election pledges and high interest rates lead to low expenditure flexibility and continue to drive expenditure growth. Fitch expects revenue will stagnate due to the economic slowdown and current geopolitical situation. This will result in continued deficits being covered by more borrowing in the medium term.

Ryazan region's direct risk amounted to RUB26.9bn, of which 41% or RUB11bn was represented by federal budget loans. Direct risk exceeded 78% of current revenue at end-2014 (2013: 75%). The region's debt coverage and debt servicing ratios are weak. However, low cost federal budget loans and medium-term bank loans have partly eased pressure on the regional budget in 2014.

Fitch estimates Ryazan region's immediate refinancing needs as low: 14% or RUB3.7bn of direct risk matures in 2015. This was achieved thanks to almost RUB5bn of federal budget loans provided in 2014 to replace market debt. Overall, the regional administration has improved debt management practices by extending debt maturity over the past years. The agency does not expect the region to face difficulties refinancing its debt in 2015 under a base case scenario. However, high market interest rates could put additional pressure on the budget.

The agency expects stable operating surplus at about 3%-4% of operating revenue in 2015-2017. However, it will remain weak for debt servicing needs. The operating surplus improved to 7% of operating revenue in 2014 from 3% in 2013 as the administration controlled opex, which increased by a marginal 1% in 2014 compared with average annual growth of 8%-9% in 2010-2013. The budget deficit improved to 6% of total revenue from 18% in 2013 as the region cut capex to RUB6.7bn or 12% of total expenditure in 2014 from RUB10.5bn or 19% of total expenditure in 2013.

According to the administration's estimates, the local economy expanded by 1.7% in real terms in 2014, which exceeded the estimated real growth of the Russian GDP of 0.6%. The administration expects the local economy will continue to grow at about 1%-2% annually in the medium term. The region's economy is modest in the national context but is fairly diversified and benefits from close proximity to Moscow, the country's capital. The top 10 taxpayers accounted for a moderate 25% of consolidated tax revenues of the region and its municipalities in 2014.

The ratings are negatively affected by the evolving nature of the institutional framework for local and regional governments (LRG) in Russia. It has a shorter track record of stable development than many of its international peers. The predictability of Russian LRGs' budgetary policy is constrained by the continuous reallocation of revenue and expenditure responsibilities within the government tiers.

RATING SENSITIVITIES
The region's inability to curb growth of total indebtedness, accompanied by persistent refinancing pressure and a negative current balance, would lead to a downgrade.