Fitch Affirms the Flemish Community at 'AA'; Outlook Stable

Tue Oct 15, 2013 11:46am EDT

PARIS, October 15 (Fitch) Fitch Ratings has affirmed the Flemish Community's Long-term foreign and local currency ratings at 'AA', with a Stable Outlook, and its Short-term foreign currency rating at 'F1+'. Fitch has also assigned long-term foreign and local currency ratings of 'AA' and short-term foreign currency rating of 'F1+' to the Flemish Community's EUR10bn EMTN programme, and a short-term foreign currency rating of 'F1+' to its EUR1.5bn Belgian commercial paper programme. The ratings are underpinned by the Flemish Community's sound budgetary performance, its favourable debt metrics and a strong socio-economic profile. The Stable Outlook reflects our forecast of a slightly weaker budgetary performance and falling debt, and our assumption that upcoming institutional reforms will not undermine performance. KEY RATING DRIVERS Fitch does not expect institutional reforms, which will devolve important responsibilities from the federal state to federated entities starting 2015, to weaken budgetary performance. This is because strong compensation and equalisation mechanisms will be put in place for a period of 10 years to neutralise its financial impact. The Flemish Community has low budgetary autonomy as revenue is mostly based on common and shared federal taxes, linked to GDP growth and inflation. Expenditure flexibility is limited by indexation formulae and multi-year contracts. Unexpected revenue shortfalls are met by spending cuts in certain areas, due to systematic contingency planning. Its operating margin weakened slightly in 2012 but remained comfortable at 10.3%. This was due to slower revenue growth (3.3%), notably of current transfers, while expenditure increased at a steady pace. We forecast poorer performance over the medium term, as revenue growth should be lower on average at 2.2% annually, mainly due to slower growth of current transfers. Operating expenditure, excluding devolved responsibilities, should grow 2.7% per year. Direct debt slightly declined in 2012 to EUR6.4bn or 24.2% of current revenue. It is moderate compared with that of peers, with a debt payback ratio of 2.6 years. Fitch expects direct debt to decrease further to about 17.5% of current revenue in 2016, due to repayment by KBC of the financial support received in 2009. We expect debt payback ratio to improve to 2.2 years in 2016 and debt service coverage to remain comfortable (on average 46% of operating balance until 2016). Access to short-term funding is strong, owing to a EUR3bn credit line with ING Belgium (A+/Negative/F1+) and its EUR1.5bn commercial paper programme. High debt service coverage and predictable cash flows also help limit refinancing risks. The Flemish Community has low budgetary autonomy as revenue is mostly based on common and shared federal taxes, linked to GDP growth and inflation. Expenditure flexibility is limited by indexation formulae and multi-year contracts. Unexpected revenue shortfalls are met by spending cuts in certain areas, due to systematic contingency planning. Flanders is one of the most productive regions in Europe, and benefits from a diversified economy, skilled workforce and high quality infrastructure. Its export-oriented profile exposes its economy to international trade flow fluctuations, but unemployment is structurally low and GDP per capita slightly higher than in Belgium as a whole. Flanders manages its finances effectively, which results in reliable budget forecasts and efficient contingency planning. This helps the Flemish Community to comply with its stated commitment to fiscal balance in the medium term. Guaranteed debt and public-private partnerships commitments are high but represent moderate risks, due to the nature of guaranteed entities (public authorities, social housing companies) and also because of the Flemish Community's prudent risk management policies. RATING SENSITIVITIES A downgrade may stem from a consistently weak performance resulting in direct debt rising beyond 40% of current revenue and the debt payback ratio to more than eight years. A downgrade of Belgium would also be reflected in the Flemish Community's ratings. The Flemish Community's ratings may be upgrade from a similar rating action on Belgium's ratings. KEY ASSUMPTIONS Our base case scenario relies on the following key assumptions: -National real GDP growth of 0% in 2013, 0.8% in 2014, 1.3% in 2015 -Repayment by KBC of EUR1.75bn in 2013 and EUR500m per year thereafter -Actual expenditure below budgeted expenditure (by EUR600m in 2013 and EUR400m per year thereafter) -Average capital expenditure of EUR3bn per year from 2013 to 2016 -Neutral financial impact of the institutional reform Contact: Primary Analyst David Lopes Associate Director +33 1 44 29 91 45 Fitch France S.A.S. 60, rue de Monceau 75008 Paris Secondary Analyst Christophe Parisot Managing Director +33 1 44 29 91 34 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. Additional information is available on www.fitchratings.com Applicable criteria, "Tax-Supported Rating Criteria", dated 14 August 2012, "International Local and Regional Governments Rating Criteria outside United States", dated 9 April 2013 on www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. 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