February 10, 2017 / 7:07 PM / 5 months ago

Fitch Affirms Autonomous Community of Asturias at 'BBB'; Outlook Stable

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(The following statement was released by the rating agency) BARCELONA, February 10 (Fitch) Fitch Ratings has affirmed the Spanish Autonomous Community of Asturias's (Asturias) Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BBB' with Stable Outlooks. Fitch has also affirmed the Short-Term Foreign Currency IDR at 'F2'. The ratings on the senior unsecured outstanding bonds have been affirmed at 'BBB'. The affirmation reflects Asturias's still weak fiscal performance, a moderately high direct debt burden and financial support from the central government. The Stable Outlook incorporates Fitch's expectations that the region's fiscal performance will gradually improve, limiting direct debt growth to 107%-110% of current revenue through to 2017, compared with 106% in 2015. KEY RATING DRIVERS Operating Performance Expected to Improve Asturias received approval of its 2017 budget with the support of the Partido Popular Party and Ciudadanos Party. The budget will be subject to modifications once the central government has communicated its final financial system allocations for 2017. Fitch expects the region's operating performance to have improved in 2016, which should continue into 2017, with an operating margin of 1%-3%, compared with 1% in 2015, excluding EUR25 million one-off spending items. The expected improvements are based on projected operating revenue growth of 3%-4% driven by national economic recovery. Operating expenditure is likely to grow on average 2%-3% in 2016-2017, after the autonomous community lifted cost-containment policies introduced in 2010-2014. The funding system for Spanish regional governments is likely to be reviewed over the medium term but Fitch does not factor in its projections a change of the system. Rising Direct Debt Fitch estimates Asturias's direct debt to have grown further in 2016 to EUR3.4 billion-EUR3.5 billion, or 105%-110% of current revenues, from EUR3.2 billion (106%) in 2015 and EUR3 billion (101.5%) in 2014. Pressure on debt servicing is high, with overall debt repayments for the next three years totaling EUR1.2 billion, or 36.3% of estimated outstanding direct debt at end-2016. However, default risk is mitigated by 42% of estimated direct debt at end-2016 being contracted through the state support mechanism, at subsidised rates. We forecast debt servicing obligations will absorb 14%-18% of expected current revenues (12% in 2015). Central Government Support State-supported debt has been underpinned by the central government's move to ratify its financial support on 23 December 2014 by introducing further measures to ease the debt burden of autonomous communities, including, in 2015, zero-interest loans. Nevertheless, Asturias in 2016 turned to bank loans to finance its debt redemptions and budgetary needs. Moreover, in December 2016, it refinanced for the first time several debt operations through capital market debt, lowering interest rates. Regional Economy Recovering Asturias's economy grew 3.5% in 2015 to an estimated nominal GDP of EUR21.3 billion. Economic growth since 2015 has led to higher tax revenues, increasing 2% in November 2016 yoy. Job creations increased 3.7% between December 2013 and December 2016, after 43% jobs were lost between December 2008 and December 2013. Asturias's employment rate is lower than the national average due in part to its ageing population. The region has a higher share of elderly population than Spain (24% versus 18.4%), which translates into more pressure on social public services. RATING SENSITIVITIES Direct debt exceeding 150% of current revenue (2015: 106%), or a negative operating balance, could trigger a negative rating action. The ratings could be upgraded if the regional government reports a positive current balance and if direct debt trends towards 100% of current revenue. KEY ASSUMPTIONS Fitch assumes that the state will continue providing support to the Spanish autonomous communities over the medium term, in particular, through the liquidity mechanism. Discussion on the regional financial system is ongoing in Spain, and changes are in prospect over the medium term. However, Fitch does not factor such changes into Asturias's IDRs. Contact: Primary Analyst Julia Carner Analyst +34 93 323 8401 Fitch Ratings Espana, S.A.U. Av. Diagonal, 601, Barcelona 08028 Secondary Analyst Guilhem Costes Senior Director +34 93 323 8410 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; Pilar Perez, Barcelona, Tel: +34 93 323 8414, Email: pilar.perez@fitchratings.com. 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