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Fitch Affirms Autonomous Community of Andalusia at 'BBB-'; Outlook Stable
October 20, 2017 / 8:22 PM / a month ago

Fitch Affirms Autonomous Community of Andalusia at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) BARCELONA/PARIS/LONDON, October 20 (Fitch) Fitch Ratings has affirmed the Autonomous Community of Andalusia's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB-' with Stable Outlooks. Fitch has also affirmed the Short-Term Foreign-Currency IDR at 'F3'. Fitch has also affirmed the 'BBB-' ratings on Andalusia's outstanding senior unsecured bonds and the 'BBB-' and 'F3' ratings on Andalusia's commercial paper (pagares) programme. The affirmation reflects Andalusia's still weak, but improving, 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, with direct debt stabilising at 140% of current revenue over the medium term, after having peaked at 143.9% in 2016. KEY RATING DRIVERS Expected Operating Performance Improvement Operating performance improved in 2016 with a positive operating margin for the first time since 2010 of 1.4%, backed by higher revenue from the financial system of around EUR1.8 billion, equivalent to 8.1% of 2015's operating revenue. Andalusia also met the 0.7% fiscal deficit financial goal set by the Budgetary Stability Law for the year, posting an overall fiscal deficit of 0.65%. Fitch expects this trend to be sustained over the medium term, as economic growth above 3% over 2015-2017 in Spain is being translated into enhanced tax revenue collection. These will be transferred to the regions with a two-year lag given the singularities of the regional funding scheme in Spain. The resources from the financial system are EUR0.8 billion higher in 2017 vs. 2016 for Andalusia, mainly from higher revenue current transfers, and the interim results as of 1H17 shows a current margin of around 4.5%, according to the Ministry of Finance and Civil Service. A further growth of 3.8% on average in resources from the financial system is expected in 2018 for all regions (around EUR0.5 billion for Andalusia), corresponding to similar increases in opex and capex. All in all, Andalusia's operating margin should be 3%-4% in 2017-18 under Fitch's base case scenario, accompanied by a small current margin of 1%-2%. We also expect Andalusia to meet the fiscal deficit goal of 0.6% GDP in 2017. Central Government Support The region held EUR22.5 billion in debt from state liquidity mechanisms at end-2016, close to 70% of its total debt, illustrating strong support from the central government. This mainly includes the Regional Liquidity Fund (FLA), which was established in 2012 by the central government to support Spanish regions facing difficulties in accessing capital markets; and the Supplier's Fund (FFPP), a mechanism implemented to help regions pay their arrears to suppliers. Debt contracted under these mechanisms is repaid evenly over 10 years. Under Fitch's base case scenario, Andalusia's funding needs of EUR4.8 billion in 2017 are mainly covered by the FLA. This access to state support will continue to ensure timely debt servicing, as the region faces high redemptions over the next three years, which at end-2016 exceeded 30% of outstanding debt. As a result, the share of state liquidity in the region's total debt will grow over the medium term. Direct Debt Stabilisation Fitch estimates Andalusia's direct debt to have grown further in 2016 to EUR31.9 billion, from EUR30.1 billion in 2015. Fitch expects it to grow towards EUR33.5 billion over the medium term. However, direct risk as a share of current revenue is likely to have peaked in 2016 at 143.6%. State liquidity, at an average interest rate around 0.8% in 2017, will help Andalusia maintain a low debt burden despite the high nominal debt. The liquidity profile of Andalusia has improved steadily in the last five years, and its net fund balance (including cash, payables and receivables) was EUR1.2 billion at end-2016, from minus EUR0.8 billion in 2012. Andalusia's days payable-to-suppliers ratio was a negative 3 days in July 2017, one of the lowest within autonomous communities in Spain. This means that the region on average pays before the legal period to settle invoices lapses. Recovery of Regional Economy Andalusia has a weaker economic profile than Spain, with a GDP per capita equivalent to 74% of the national average, although this is average by international standards. Its GDP grew 3.2% in 2016, slightly below Spain's 3.6%. Fitch expects the figure to be above 3% per year in 2017-2018, underpinning the region's budgetary performance. The labour market has also improved as unemployment decreased to 25.2% in 1H17 (Spain: 17.2%), from 28.9% in 2016. Likewise, the number of registered worker grew 1.2% during the same period. The regional government is implementing a number of programmes to address the informal economy and foster the labour market, which will be positive for tax revenue. RATING SENSITIVITIES Direct debt exceeding 150% of current revenue or a negative operating balance may weaken Andalusia's credit profile, but this will not impact the IDRs as long as the floor support of 'BBB-' for Spanish autonomous communities is maintained. The ratings could be upgraded if the regional government reports a structural positive current balance and a decline in direct debt below 130% of current revenue, associated with a sustained recovery of socio-economic indicators. 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. Discussions on the regional financial system are ongoing in Spain, and changes are in prospect over the medium term. However, Fitch does not factor in such changes into Andalusia's IDRs. Contact: Primary Analyst Patricio Novales Associate Director +34 93 323 8417 Fitch Ratings Espana. S.A.U. Avda. Diagonal, 601, Barcelona 08028 Secondary Analyst Guilhem Costes Senior Director +34 93 323 8410 Committee Chairperson Guido Bach Senior Director +49 69 768076 111 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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