July 21, 2017 / 8:16 PM / 8 months ago

Fitch Affirms Italian Region of Sicily at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) MILAN/LONDON/PARIS, July 21 (Fitch) Fitch Ratings has affirmed Sicily's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB' with Stable Outlooks, and Short-Term Foreign Currency IDR at 'F3'. The affirmation reflects Fitch's expectation of gradually strengthening fiscal performance and a balanced budget, driven by increasing and stable allocations from the state, subject to the region meeting cost savings and investment objectives. The affirmation also factors in moderate direct risk and sound liquidity, while taking into account Sicily's weak economic fundamentals. The Stable Outlook reflects our expectation of no major adverse changes to the region's credit fundamentals over the medium term. KEY RATING DRIVERS Towards a Balanced Budget Fitch expects Sicily's operating margin to gradually improve towards 5% of operating revenue by 2019-2020, net of pass-through and extraordinary items, from 2% in 2015-2016 and an average of -3% in 2011-2014. The improvement is driven by a bilateral agreement signed with the national government in 2016, according to which net state funding will progressively increase to EUR1.7 billion annually from 2017. This is subject to a number of objectives, including cost savings and increasing investments, being met. The healthcare sector, accounting for nearly two thirds of operating revenue as calculated by Fitch, or around EUR9 billion, remained balanced in 2016, alleviating the burden on the regional budget, although cost savings failed to be met. Moderate Direct Risk Sicily's stock of debt amounted to EUR8 billion at end-2016 (EUR8.2 billion in 2015), corresponding to half of operating revenue, when including EUR2.5 billion subsidised loans to pay down commercial healthcare liabilities and EUR135 million loans charged to the national government. Fitch forecasts net overall risk, including public sector entities' (PSEs) debt and guarantees, to remain around EUR8 billion in 2017-2019, or below 55% of the regional budget. Fitch expects the operating balance to fully cover interest and principal payment in the medium term, which the agency forecasts to represent a low 3.6% of operating revenue. Sicily's liquidity remained satisfactory at EUR724 million at end-2016, without drawing on its credit lines; this liquidity buffers cover 1.5x debt servicing requirements. Improving Economy With a GDP per capita at about 65% of Italy's and an unemployment rate twice the national average (22% versus 11%) at end-2016, Sicily's economy remains one of the weaker regions in Italy. However, from 2015-2016 GRP showed signs of a recovery. In 2016 positive trends in the tertiary sector, in particular tourism, more than offset industry output stagnation and declining exports (down 17%, except for agriculture and food), leaving regional revenue little changed. As part of Sicily's commitment to the agreement with the national government, Fitch expects regional capital spending to reach up to EUR10 billion during the 2014-2020 planning period, backed by capital transfers and EU funds. This should support a 0.5% recovery in GDP, and together with services and expected export recovery, help strengthen the regional tax base over the medium term, despite a significant shadow economy and some corruption preventing full efficient use of available resources. Neutral Institutional Framework Despite its autonomous status, Sicily continues to contribute to Italy's efforts to balance the national accounts. On the other hand, the national government supports regional efforts to cut spending and improve investments, through the provision of additional resources from 2016 in its revised agreement with Sicily. Moreover, subsidised loans and state-charged debt underpin substantial support from the national government. Challenging Management The fund balance deficit, as calculated by Fitch, shrank less than expected in 2016 to EUR3.5 billion due to restated provisions aimed at ensuring an adequate buffer against possible adverse future events. Annual fund balance deficit recovery accounts for about EUR200 million until 2045, partially neutralising the reprieve from increasing allocations from the national government. Fitch will monitor the recovery plan implementation and the region's constant cash flow sustainability. After strengthening constitutional relations with the state in 2016, the regional administration is committed to streamlining its rigid cost structure dominated by healthcare expenses, interest payments and wages (more than 80% of total), while revitalising the regional economy to support revenue. RATING SENSITIVITIES Failure to stabilise the operating balance at 3% of revenue, to at least largely cover debt-servicing requirements or unexpected growth of debt towards 75% of operating revenue could lead to a downgrade, especially if the economy remains sluggish. A downgrade of Italy would also lead to a downgrade of the region. Conversely, a sovereign upgrade could result in the same action on Sicily provided the regional operating margin strengthens towards 10%, and Sicily achieves an overall balanced budget and current surplus matching principal repayment over the medium term. Contact: Primary Analyst Federica Bardelli Associate Director +39 02 87 90 87 261 Fitch Italia SpA Via Morigi 6 - Ingresso Via Privata Maria Teresa, 8 20123 Milan Secondary Analyst Gian Luca Poggi Director +39 02 87 90 87 293 Committee Chairperson Christophe Parisot Managing Director + 33 1 44 29 91 34 Media Relations: Stefano Bravi, Milan, Tel: +39 02 879 087 281, Email: stefano.bravi@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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