January 13, 2017 / 7:08 PM / 7 months ago

Fitch Affirms Catalonia at 'BB'; Outlook Negative

(The following statement was released by the rating agency) BARCELONA, January 13 (Fitch) Fitch Ratings has affirmed the Autonomous Community of Catalonia's (Catalonia) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB' with Negative Outlooks. Fitch has also affirmed the Short-Term Foreign Currency IDR at 'B'. The ratings on the senior unsecured outstanding bonds have been affirmed at 'BB'. The affirmation reflects the ongoing liquidity support that Fitch assumes will be provided through the Regional Liquidity Fund (FLA) to support Catalonia's debt obligations in 2017. The ratings also reflect protracted political uncertainty stemming from the evolving relationship between the executives of Spain and Catalonia. The Negative Outlook reflects the political risks the region faces over the next couple of years. Potential outcomes of ongoing political tensions could be an abrupt separation from Spain or the withdrawal of state support over the medium term, specifically in light on the potential vote on Catalonia's independence scheduled in September 2017 according to the regional government's agenda. KEY RATING DRIVERS Political Tension Continues Political uncertainty continues to prevail over the region and the ruling party Junts Pel Si (JxS, centre-right wing), with support of CUP, a far left wing party, is pushing to hold a vote on Catalonia's independence in September 2017. In addition, as the 2017 budget has yet to be approved by the regional parliament and after a failure to enforce the 2016 budget, the region may again roll over 2015's budget. JxSi has stated that if no parliamentary approval is given to the 2017 budget, new elections might be called during 2017. At the national level, the newly elected executive in October 2016 is, in Fitch's view, keen to make progress on its discussion with the Catalonian regional government over the latter's funding and public investment policies without compromising Spain's constitutional integrity. Uncertainty over Catalonia since the regional government pushed for independence has weakened the institutional relationship with the central government, and Fitch as a result suspended its 'BBB-' Support Rating Floor for Catalonia in November 2015. In Fitch's view, The September 2017 vote, if it takes place, and its outcome will define the framework for Catalonia's relationship with the central government over the medium term. Debt Redemption Supported Fitch is monitoring the assistance the central government is providing Catalonia through the FLA in the region's redemption of EUR5,466m long-term debt in 2017. The servicing of debt on a timely basis by the FLA is key to Catalonia's 'BB' Long-Term IDR. An additional EUR4,429m in short-term debt will fall due in 2017, which will be rolled over by Catalonia under the oversight of the Ministry of Finance and Civil Service (MinHap). Fitch believes MinHap's monitoring and the coverage of these maturities by FLA as a last resort mitigate the liquidity risk. Catalonia is a major recipient of state liquidity support, and received EUR10bn from the FLA in 2016 so that borrowing from the central government amounted to EUR51bn, or 75% of Catalonia's estimated total debt on the same date. Fitch estimates Catalonia will borrow at least EUR7.5bn from the FLA in 2017. Weak Performance, Expected Improvement Catalonia's budgetary performance has been weak, with negative current balances since 2009. The region's 2015 results showed a negative current margin of 21.6%, which was below Fitch's expectations. However, we expect an improvement of the region's budgetary performance in 2016, due to an additional EUR2bn inflow stemming from higher financial system allocations and a positive settlement from 2014, and a lower debt burden. Higher self-collected taxes, fostered by the economic recovery, are also expected to have contributed to the improvement. Fitch base case scenario forecasts Catalonia will post a negative current margin below 10% in 2016. Overall, Fitch base case scenario estimates a fiscal deficit close to 1% in 2016, a significant improvement from 2015's 2.7% deficit, but still in breach of the 0.7% deficit goal. Fitch expects Catalonia to continue improving its budgetary performance in 2017, driven by enhanced operating revenues, but volatile performance is possible given the region's recent budgetary track record. We expect debt growth to slow slightly on the back of higher revenues, with debt representing around 300% of current revenue at end-2016, down from 310% in 2015. Regional Economy Growing Catalonia has an above-average economic profile and sees faster growth than the national economy. Nominal GDP grew 3.9% against 3.8% nationally in 2015, and the unemployment rate was 14.6% in 3Q16, versus 18.9% in Spain. Moreover, the number of registered workers in Catalonia increased 4% yoy as of end-November 2016, versus 3% nationwide. Although the economic recovery has not been affected by the current political uncertainty, unilateral independence of Catalonia is likely to result in economic shock. RATING SENSITIVITIES Fitch will continue to monitor developments in Catalonia, in particular a potential referendum on independence, and will take negative rating action if state liquidity support weakens as a result. If the political relationship with the central government returns to normal, Fitch will reinstate the Support Rating Floor of 'BBB-' for Catalonia. KEY ASSUMPTIONS Fitch assumes that the region will continue to have access to state support for debt servicing over the medium term. Contact: Primary Analyst Patricio Novales Analyst +34 93 323 84 17 Fitch Ratings Espana, S.A.U. Paseo de Gracia, 85, Barcelona 08008 Secondary Analyst Guilhem Costes Senior Director +34 93 323 84 10 Committee Chairperson Christophe Parisot Managing Director + 33 1 44 29 91 34 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Pilar Perez, Barcelona, Tel: +34 93 323 8414, Email: pilar.perez@fitchratings.com. 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