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Dec 2 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings says in a new report that the Rating Outlook for global (non-US) local and regional governments (LRGs) is generally Stable but challenges remain in some countries. Fitch expects a gradual shift in Outlook to Stable from Negative for LRGs in line with an improved economic environment and a general recovery in the subnationals' fiscal performance. However, for certain countries, in particular Russia, we expect negative rating actions to exceed that of positive.
In the euro zone the growth in debt experienced in recent years is now stabilising because of a greater emphasis on cost control and also in view of the economic recovery. As a result operating performance should improve but potentially higher interest costs may erode current balances. Narrower overall fiscal deficits have led to a number of Outlook revisions to Stable from Negative, particularly in Spain, in 2013.
Subnationals in developing European countries have been negatively impacted by lower transfers from central governments and high capex needs, resulting in wider budget deficits. At the same time, their less developed capital markets and a shortage of long-term bank loans, could lead to refinancing risks particularly for LRGs with a high proportion of short-term debt.
In Russia a slowdown in the economy is leading to tax-base contraction and continuous pressure on operating expenditure. LRGs are also facing growing centralisation of fiscal decisions at the federal level. These factors have led to a decline in fiscal flexibility and a lower self-financing capacity.
In Latin America, the general economic improvement is feeding through to local governments. Increased fiscal revenues experienced by the subnationals have been applied to capital expenditure although part of this investment is being funded through debt. The debt burden is presently manageable given revenue growth and low debt levels but could significantly increase in an economic downturn.
In Asia there is significant infrastructure backlog from rapid urbanisation and natural increases in population. This is creating pressure on capital expenditure and also on the need to expand and improve the mass transit systems in some major capital cities, particularly in China.
Subnationals in Australia have taken budgetary steps to change their generally negative fiscal outcomes. The mining concentrated states of Australia namely Queensland and Western Australia will see benefits from increasing royalty revenues as export volumes increase and new gas projects come online.
The Rating Outlook is sensitive to factors such as a slower-than-expected economic recovery, which could temper the expected improvement in the subnationals' finances. Also capital expenditure has been cut back in recent years to reduce deficits but this may be reversed as political pressure and the need to replace ageing infrastructure result in increased spending.
Loosening of control by the central government on local government finances, particularly on operating expenditure, could lead to a relaxation of measures and to a slower-than-expected recovery of the fiscal balance.
The full report, entitled "2014 Outlook: International Public Finance: Slow Recovery but Challenges Remain", is available at www.fitchratings.com/outlooks.
Link to Fitch Ratings' Report: 2014 Outlook: International Public Finance