TEXT-Fitch cuts Italy's region of Sicily to 'BBB'
(The following statement was released by the rating agency)
Oct 29 - Fitch Ratings has downgraded the Region of Sicily's Long-term foreign and local currency ratings to 'BBB' and Short-term foreign currency rating to 'F3' from 'BBB+' and 'F2' respectively. The Outlooks are Negative. The action affects about EUR6bn of debt outstanding, including a bullet bond of EUR568m maturing in 2015 and future direct borrowing. The downgrades reflect Fitch's expectations of a prolonged period of budgetary deficits amid growing financial and commercial liabilities in a context of resources drained to maintain the healthcare sector roughly in balance. The Negative Outlook reflects the implementation risks of proposed budgetary adjustment measures centred on potentially sensitive spending cuts and revenue strengthening measures which have an uncertain outcome. The rating may be downgraded further over the next two years should the region fail to deliver an operating surplus prolonging the reliance on preferential payments for timely debt servicing. Conversely, the Outlook may be revised to Stable if the region restores a fiscal balance, reverts the accumulation of operating payables and reduces the fund balance deficit which Fitch expects to edge closer to EUR1bn by 2012, from a rough balance in 2010. Fitch expects that the 5% operating deficits posted in 2011 will not be overcome before 2014 when an equal contribution of revenue growth and cost curtailment should lead to a positive, yet frail, operating surplus of about 2%, barely covering interest costs in 2015. Sicily expects some boost in revenue due to the hikes in minor local taxes and to the eventual reclaiming of VAT proceeds stemming from a rate rise passed in 2011 by the national government in which it retained for the balance of its accounts. Fitch believes that a more accelerated growth of taxes will be hampered by regional GDP contracting by about 3% in 2012 and 1% in 2013. Taxes should therefore languish at about EUR11.5bn by 2015 amid declining state subsidies. Cuts in transfers to municipalities and to costs for goods and services may contribute to stabilizing opex below EUR15bn. However, Fitch notes that political and management discontinuity will not make spending reforms fully effective before end 2013. Sicily has balanced its healthcare sector and Fitch believes this will not represent a major pressure on operating costs in 2013-2014. The deeper-than-national GDP contraction will stem, in Fitch's forecast, from the impact of the regional budgetary measures which will add up on those passed by the state, depressing consumption and attractiveness for private investors. The adverse impact of the unemployment rate, seen by Fitch to rise towards 17% in 2013, from 14% in 2011-2012, should be mitigated by Sicily's shadow economy which is a buffer for consumption. Against a feasible, though ambitious, plan to reduce opex by an approximate annual nominal 3% in 2013-2015, Fitch sees room to shrink capital spending. The obligation for Italian subnationals to balance their budget since 2014 may translate into a 2013-2015 capital plan of EUR6bn-EUR7bn in Fitch's scenario, as opposed to Sicily's projections of EUR9bn. The absence of large and rigid projects offers flexibility, though infrastructure needs remain. Sicily's gross debt increased to about EUR6bn in 2012 from EUR5bn in 2009. The relaxation of the stability pact agreed with the state leads Fitch to believe it can grow to EUR7.5bn by 2015 i.e. 50% of current revenue and about 8% of GDP. Debt service protection ratios, however, are in negative territory and timely debt service relies on the subordination of commercial to financial obligations. The EUR1bn debt of cities towards their agencies for waste collection is a potential regional contingent liability, in Fitch's opinion. Net of receivables that Fitch deems uncollectible, Sicily's reserves have remained close to zero for years and in 2011 the fund balance turned negative. Operating payables rose by EUR1.5bn to EUR4bn in 2011 highlighting cash stress from weak spending control and stagnant cash inflows. Pending the implementation of fiscal adjustments following elections Fitch sees the fund balance deficit widening throughout 2012 to about EUR1bn. (Caryn Trokie, New York Ratings Unit)