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Fitch affirms Kursk region at 'BB+'; Outlook Stable

Fitch Ratings has affirmed Russian Kursk Region's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB+', with Stable Outlooks, and Short-term foreign currency IDR at 'B', the rating agency informed.

Fitch has also affirmed the region's National Long-term rating at 'AA(rus)' with Stable Outlook.

The affirmation reflects the region's low direct risk and contingent liabilities and large self-financing of capex. The ratings also factor in the moderate size of the region's budget, weakening operating balance and modest but growing local economy.

Fitch expects the operating balance will stabilise at 5% of operating revenue in the medium term, which is lower than the high average of 18% during 2009-2012. In 2013, the operating balance deteriorated to 4.9% of operating revenue, but this fully covered debt servicing needs (principal repayment and interests) due to the low level of debt. The region suffered from both deceleration of tax proceeds and high pressure on operating expenditure in 2013. The latter was driven by the federal government's decision to increase salaries to public sector employees, bringing them in line with the average regional salary.

Fitch believes the region will reduce its historically high capex to an average 16% of total spending in the medium term (2011-2013: average 26%) to control the budget deficit at below 5% of total revenue. The deficit before debt averaged a moderate 4.5% of total revenue during 2011-2013. The region's self-financing capacity (current balance and capital revenue) continued to be strong in 2013 as it covered around 80% of capex.

Fitch expects the region's direct risk will remain low in the medium term and will account for around 15% of current revenue in 2016. In 2013 direct risk accounted for 12% of current revenue, 40% of which was composed of subsidised loans from the federal budget. The residual part of the direct risk comprised short-term bank loans with maturity in 2014. Kursk has already redeemed these bank loans ahead of schedule, and as of 1 May 2014 it was free of market debt. The region's contracted but unutilised credit lines with banks, which can be used if the need arises during 2014 amount to RUB4.3bn.

The region has not provided guarantees since 2008 and the stock of guarantees issued to agricultural companies during 2005-2007 decreased to RUB1.1bn in 2013, which corresponds to 3% of operating revenue (2012: RUB1.3bn). Kursk's public-sector entities were debt-free in 2013.

During 2011-2013 the region's economic growth outpaced the national average. The administration expects 4%-yoy growth of gross regional product (GRP) for 2014, which is likely to remain above the national average. Nevertheless, the region's economy is still modest, with GRP per capita 7% lower than the national median in 2012. The region has a diversified industrial sector and is strong in agriculture.

Russia's institutional framework for subnationals constrains the 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.

Among the rating sensitivities, the restoration of the operating balance to its historically high level of around 15% of operating revenue coupled with debt payback aligned with the average maturity profile of the region's debt would lead to an upgrade. Growth of short-term debt leading to high refinancing pressure accompanied by further deterioration of operating performance would lead to a downgrade

"AK&M", 26.05.2014


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