(The following statement was released by the rating agency)
Jan 25 - Fitch Ratings has affirmed the Italian Region of Calabria's Long-term foreign and local currency ratings at 'BBB+', and Short-term foreign currency rating at 'F2'. The Outlooks remain Negative. The affirmation affects approximately EUR1.2bn of outstanding debt, as well as future borrowing.
The affirmations reflect the progress in the healthcare rebalancing process, which sustained regional operating performance, the substantial financial support from the state and the EU, and the still moderate, albeit growing, debt level. The Negative Outlook considers increasing budgetary pressure stemming from the national fiscal adjustment as well as potential cost pressures stemming from delays in the planned restructuring of the healthcare network.
The roll out of the state-controlled healthcare recovery plan is working. Tight spending control - which stabilised healthcare costs at EUR3.4bn - combined with hikes in personal income and business taxes devoted to healthcare balanced the sector in 2011 and 2012, according to preliminary estimates. However, the sector's account could come under renewed pressure in 2013-2014 due to sluggish, or slightly diminishing, national healthcare funds. In this context, the delivery of the planned restructuring of the healthcare network is a key measure to align the sector's cost base to available resources and, ultimately, maintain balanced sector accounts.
Sluggish tax income due to economic recession and the curtailment of transfers in the framework of national fiscal adjustments will also add pressure to the regional budget. Under Fitch's scenario, lower state subsidies of around 10% will push the regional operating margin down to around 2% (EUR100m) by 2014, from 3.5% averaged over the past two years. This might compound the financial pressure of non-healthcare related sectors - such as transportation and environmental protection - thus generating off-balance sheet liabilities for the region.
The regional budget will however continue to benefit from strong public sector support. To cover the past healthcare deficit of around EUR1bn, central government extended a 30-year EUR428m loan to the region in 2011 and, in mid-2012, agreed to devolve to the healthcare sector EUR578m of extraordinary state funds presently allocated for socio-economic development. The progressive inflows of these resources into the regional budget, together with the release of around EUR800m in pending healthcare-related credits with the state, should ease pressure on the region's liquidity and reduce healthcare entities' high level of commercial liabilities which reached around EUR1.9bn at end-2011.
Fitch expects Calabria's 2013-2014 cumulated capex of around EUR1.2bn to be mostly funded by EU and state subsidies, thus limiting deficit before debt to around EUR100m per year in 2013-2014, or 2% in Fitch projections. However, Calabria's low spending capacity has contributed to an accumulation of an almost-entirely earmarked fund balance surplus of EUR4.9bn, which reduces the need for future heavy borrowing.
As a result, Calabria's moderate debt of EUR1.2bn (25% of revenue) - which also includes EUR176m of debt fully subsidised by the government - should only slightly increase to EUR1.3bn by 2014 mainly due to EU co-funding needs. Nonetheless, the expected fall in the operating margin to around 2% should weigh on debt sustainability with the debt to current balance ratio deteriorating towards 30 years, from around 10 years, averaged in 2010-2011.
The rating could be downgraded if failure to pass cuts in national subsidies on the spending side will push the operating margin down to 2%, thereby weakening the debt and debt service protection ratios.
A material deviation from cost-control measures of the healthcare recovery plan could also negatively weigh on the rating. Conversely, a tangible reduction of the healthcare sector's liabilities and a full debt-servicing coverage could bring the Outlook back to Stable.
The ratings are sensitive to a number of assumptions.
- Fitch assumes the contingent liabilities potentially stemming from the region's wider public sector are limited.
- It is also assumed that the national government will continue to tightly oversee the timely implementation of the healthcare recovery plan.
- It is also assumed that Calabria will continue to benefit from strong public sector support, including government co-funding of forest management employees.
Located in southern Italy, Calabria has about two million inhabitants and a weak local economy by international standards, as indicated by per capita GDP 35% below the EU average and an unemployment rate of 20%. Healthcare accounts for 12% of GDP.