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Fitch Revises Basque Country's Outlook to Stable; Affirms at `BBB+'
March 14, 2014 / 4:42 PM / 4 years ago

Fitch Revises Basque Country's Outlook to Stable; Affirms at `BBB+'

Link to Fitch Ratings' Report: Autonomous Community of the Basque Country - Rating Action ReportLONDON/BARCELONA/MILAN, March 14 (Fitch) Fitch Ratings has revised the Autonomous Community of the Basque Country's (Basque Country) Outlooks to Stable from Negative. Its Long-term foreign and local currency Issuer Default Ratings (IDR) have been affirmed at `BBB+' and its Short-term foreign currency IDR has been affirmed at `F2'. Fitch has also affirmed the Basque Country's outstanding bonds at `BBB+'. KEY RATING DRIVERS The key rating factors and their relative weights are as follows: Budgetary performance: high The revision in Outlook to Stable reflects improvements of the Basque Country's performance, with a positive operating balance in 2013 for the second year in a row, and stronger expectations that the budget deficit will continue to narrow. In 2013 the Basque government reported a preliminary deficit before debt variation of EUR734m, compared with an average annual deficit of about EUR1.6bn during the 2009-2012 period. Fitch expects the Basque Country to post a positive current balance in 2015 of about 1% of total revenues (-1.6% in 2013), which is still weak but is likely to continue to gradually improve. Economy and debt: medium The affirmation of the ratings reflects the Basque Country's strong socio-economic profile and prudent management but also its volatile fiscal performance. The ratings also take into account a large increase of debt since 2008, which has left the region exposed to high refinancing risk. The Basque Country's high degree of tax autonomy and its prosperous socio-economic position allow it to be rated above the Kingdom of Spain (BBB/Stable/F2). In common with the rest of Spain, the Basque Country has suffered an economic slowdown. Higher prosperity and greater economic resilience mean it has been less severely affected than other autonomous regions. Between 2008 and 2012, the Basque Country's GDP shrank 0.3%, compared with a 0.9% contraction for Spain. This is attributable to a diversified economy, a solid manufacturing sector, a smaller contribution from the construction sector, and much lower household debt. Wealth standards are stronger than the national average with a GDP per capita 135% of the national average. There is also a strong culture of entrepreneurship, illustrated by a much lower level of unemployment. Under its base case scenario, Fitch projects higher growth in tax revenue from 2014, enabling an improvement in the current balance. Fitch expects the region to post an operating margin between 1% and 4% in 2014 and 2015. Fitch base case scenario also assumes that debt will continue to grow, but at a more modest pace, and should remain below 95% of current revenue by 2015. Debt to GDP is projected by Fitch to remain below 13%, lower than the regional debt targets of between 13% and 13.4% for 2014 and 2015. Under the financial model within the Basque Country tax revenues are correlated to the performance of its economy while current expenditure are rigid due to the scope of responsibilities (education, healthcare, police, etc). As a result, there may be some short-term volatility in the balance between revenues and expenditure. The region's decision to maintain a high level of investment to offset the impact of the economic downturn led to an increase in debt to EUR7bn by end-2013 from less than EUR0.5bn before 2008. Even though the regional government has been able to borrow on its own in 2013, interest costs and refinancing risk have risen substantially although the latter is mitigated by access to the national Regional Liquidity Fund if needed. Debt represented 87% of current revenue in 2013 and debt servicing rose to 5.2% of current revenue, from 2.4% in 2010. RATING SENSITIVITIES Inability to report a structural positive current balance to cover a larger part of its debt repayment could result in a downgrade to 'BBB'. This is currently not Fitch's base case scenario, and the agency notes that the executive is taking measures to improve its fiscal performance. A downgrade of the sovereign rating would also lead to a downgrade of the region's rating. A positive rating action would be contingent on an upgrade of the sovereign ratings, and on significantly stronger debt servicing coverage by the operating balance than the average of 0.5x projected by Fitch over the 2014-2016 period, as well as on the debt-to-revenue ratio declining towards 80%. Under Fitch's base case scenario the Basque country will still report a debt equivalent to 92% of its current revenue in the medium term. Contact: Primary Analyst Guilhem Costes Senior Director +34 93 323 8410 Fitch Ratings Espana, S.A.U. Paseo de Gracia, 85, Barcelona 08008 Secondary Analyst Fernando Mayorga Managing Director +34 93 323 8407 Committee Chairperson Raffaele Carnevale Senior Director +39 02 87 90 87 203 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, "Tax-Supported Rating Criteria" dated 14 August 2012, "International Local, Regional Governments Rating Criteria outside United States" dated 9 April 2013 and "Rating Subnationals Above the Sovereign: Outside US" dated 2 May 2012 are available at www.fitchratings.com Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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