OREANDA-NEWS. June 09, 2015. Fitch Ratings has assigned the Russian Belgorod Region Long-term foreign and local currency Issuer Default Ratings (IDRs) of 'BB' and a Short-term foreign currency IDR of 'B'. The agency has also assigned the region's National Long-term rating at 'AA-(rus)'. The Outlooks on the Long-term ratings are Stable.

The agency has also assigned the region's senior unsecured debt a Long-term local currency rating of 'BB' and a National Long-term rating of 'AA-(rus)'.

KEY RATING DRIVERS
The 'BB' rating reflects the region's sound operating performance, moderate direct debt and strong well-diversified economy. The ratings also take into account exposure to contingent risk, the evolving institutional framework for Russian subnationals as well as the nationwide economic downturn, which could negatively influence the region's financials.

Fitch expects the region will continue to demonstrate sound budgetary performance over the medium term. The operating balance will account for around 10% of operating revenue in 2015-2017 backed by continuous control of operating spending and tax-driven growth of operating revenue. In 2014 the operating balance improved to 11% of operating revenue after a temporary drop to 2.6% in 2013. The restoration was supported by 7% cutbacks in operating spending.

Fitch assumes the scale of the budget deficit before debt will be moderate over the medium term. In 2015, the deficit will likely to increase to 7% of total revenue from low 1.4% in 2014. This year Belgorod plans to complete the construction of a perinatal centre, for which it already received federal funding in 2014. For 2016-2017 the agency expects the deficit to be around 3%-5% of total revenue on the back of moderate capital expenditure at 10%-12% of total spending.

In Fitch's view, the region's direct risk will remain moderate at below 55% of current revenue by end-2017. In 2014, the direct risk moderately increased to 51% of current revenue from 48% one year earlier. The region has a smooth and relatively long maturity profile in comparison with national peers, although debt coverage (direct risk to current balance) of seven years in 2014 was still above the average debt maturity of four years.

The region's creditworthiness remains constrained by the institutional framework for local and regional governments (LRGs) in Russia. The predictability of Russian LRGs' budgetary policy is hampered by frequent reallocation of revenue and expenditure responsibilities between the tiers of government. A new tax regime for large corporates (formation of consolidated groups and use of advanced depreciation) introduced in 2012-2013 negatively affected Belgorod's corporate income tax, which dropped 2x in 2013 compared with 2011.

Contingent liabilities accounted for around 25% of Belgorod's current revenue. Most of this refers to guarantees (RUB11.5bn) that the region provided to support regionally important enterprises, largely operating in agriculture. In addition, Fitch considers RUB4.8bn of debt at public road company Obldorsnab as direct risk as Belgorod provides a subsidy to the company to repay principal and interests on this loan.

The region has a well-diversified economy based on agriculture, mining and food processing. Its wealth indicators are strong with GRP per capita at 140% of the national median in 2013. The regional economy grew by 2.2% yoy in 2014 outpacing national weak growth of 0.6%. Fitch notices that the national economic downturn could have a negative impact on the region's economic development in 2015.

RATING SENSITIVITIES
An improved national economic context leading to a sustainable operating balance and debt coverage in line with the region's average maturity profile could lead to an upgrade.

Growth in direct risk to above 70% of current revenue, coupled with a weak close to zero current margin, could lead to a downgrade.