TEXT-Fitch ups Altai Region to 'BB+'; outlook stable

(The following statement was released by the rating agency)

Aug 14 - Fitch Ratings has upgraded the Russian Altai Region's Long-term foreign and local currency ratings to 'BB+' from 'BB' and National Long-term rating to 'AA(rus)' from 'AA-(rus)'. The Outlooks are Stable. The region's Short-term foreign currency rating has been affirmed at 'B'.

The upgrade reflects the region's continued improvement in budgetary performance, strong liquidity and low debt. The ratings also consider the modest scale of the region's economy.

Fitch expects Altai to consolidate its sound budgetary performance with an operating margin above 15% in 2012-2014. The region's operating margin was healthy at 15.6% in 2011 (2010: 20.1%). The region posted a minor deficit before debt variation at about 0.3% of total revenue by end-2011 (2010: surplus at 7.9%) and sustained a strong self-financing capacity on capital outlays with the current balance and capital revenue covering 98.8% of 2011 capex.

Altai region was net cash positive in 2009-2011, and its accumulated cash reserves stabilised at RUB8bn 2010-2011, significantly acceding outstanding direct and contingent debt obligations.

Fitch expects the region's debt to remain low as the administration's debt management policy is conservative. Altai's direct risk was below one month of current balance and less than 1% of current revenue in 2008-2011. The debt stock of the region by end-2011 was solely composed of federal budget loans of RUB472m, maturing in 2015.

The region's contingent liabilities are limited to a few outstanding guarantees and the low indebtedness of its broad public sector companies. The administration's oversight over its public sector in Fitch's view is adequate, thus limiting the region's exposure to contingent risk.

Fitch expects continued expansion in the local economy at about 5% yoy in 2012-2014 as Altai's administration promotes investment driven regional development. Investments in fixed assets increased with an average growth rate of 15% in 2010-2011, while the region's administration expects continued growth at about 15%-17% yoy in 2012-2014. Altai's economy is well diversified and is supported by several countercyclical sectors such as agriculture and trade, which amounted to 37% of GVA in 2010. However, its modest size and limited profitability of the region's agriculture, in part explains the region's historically low wealth indicators.

Any further upgrade of the ratings would be subject to consolidation of sound budgetary performance with sustainable operating balance exceeding 20% of operating revenue, coupled with moderate debt and favourable debt coverage ratios. Conversely, significant deterioration of operating performance coupled with radical increase of the region's total risk would lead to a downgrade.

The Altai region is located in Western Siberia, on the border with Kazakhstan. Its GRP accounted for 0.8% of Russia's national gross domestic product in 2010 whilst its population represented 1.7% of the national total.

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