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May 23 (The following statement was released by the rating agency)
Fitch Ratings has affirmed the Region of Veneto's Long-term foreign and local currency ratings at 'BBB+' and Short-term foreign currency rating at 'F2'. The Outlooks for the Long-term ratings are Negative, mirroring those on Italy's sovereign rating. The rating action affects financial debt outstanding of about EUR1.35bn, including EUR800m bonds, and future direct borrowing.
KEY RATING DRIVERS
The ratings affirmation reflects Fitch's expectations of an underlying operating balance of about EUR300m, or 3% of the budget, amid small budget deficits over the medium term which should limit the debt growth to below EUR2.5bn by 2015. The rating considers Veneto satisfactory debt service coverage and control on healthcare sector as well as budgetary pressures downloaded by the national government.
After a GDP contraction by 3% in 2012, Fitch expects 2% shrinkage in 2013 whereas low household debt at 35% of GDP helps to absorb the impact of the economic slack due to the weakened manufacturing activity. Exports, particularly outside EU, will partly offset the decline of internal consumption while resiliency of tourism flow should curb the surge of the unemployment rate to 8% in 2014 amid rising labour supply.
As a consequence, Fitch expects stagnant revenues in 2013 - 2014 while a mild GDP recovery should lead to 3% tax growth in 2015. Corporate failures and restructuring weigh particularly on the business tax IRAP which is seen to recover to the 2011 level of EUR3.17bn only by 2015. PIT hikes, forced by the national government, will largely offset declining IRAP proceeds while the allocation of VAT remains largely based on equalization needs for the provision of the health care.
Fitch expects Veneto's operating balance at about EUR300m, or 3% of revenue in 2013 - 2015, down from 4% trend in 2008 - 2012 as costs growth at about 2% in line with inflation, overtop sluggish revenue. The margin is rather low by international standards, yet it fully covers debt servicing requirements by 2 times. A tax leeway of about 10% of revenues provides room to absorb possible revenue-spending mismatches.
Healthcare is not seen by Fitch as a source of major pressure for the regional finances though it absorbs 75% of the budget and revenues are becoming increasingly rigid. Good planning and renovation of premises contribute to the stability of healthcare costs, which Fitch expects to average EUR9.3bn per annum in 2013 - 2015, amid high standards and specializations which keep attracting patients from other Italian regions.
The amount of outstanding financial debt may increase towards EUR2.5bn in 2015 from EUR1.35bn in 2012 as the region borrows to fund capital spending committed but not yet carried out, as highlighted by its unreserved fund balance deficit of EUR2.5bn at the end of 2012. Fitch expects the debt burden to remain low at about 25% of revenues, while debt servicing requirements will remain low at about 2% of the regional budget.
Veneto's liquidity remains satisfactory on average at EUR1bn over the last five years and Fitch expects it to be partly absorbed as internal stability pact rules are relaxed to make way for payables to be paid, helping the private sector to withstand the contraction of liquidity form the banking system. Fitch estimates Veneto operating payables to be close EUR1.5bn and expects Veneto's cash to remain above EUR250m by 2015 continuing to cover debt service requirements by 1x and the fund balance deficit to be overcome by borrowing and eventually real asset disposal.
Veneto's ratings remain constrained by Italy's as under Fitch's criteria a subnational cannot be rated above the national government lacking substantive financial autonomy. Therefore, should Italy's Outlook be revised to Stable, Veneto's Outlooks would change accordingly if the region continues to perform alongside projections. Conversely a drop of operating margin in negative territory or growth of the unreserved fund balance deficit could trigger a negative rating action.