Fitch Affirms San Marino at 'BBB+'; Outlook Negative

Fri Jan 17, 2014 12:04am EST

PARIS/LONDON, January 17 (Fitch) Fitch Ratings has affirmed San Marino's Long-term Foreign Currency Issuer Default Rating (IDR) at 'BBB+' with a Negative Outlook. The Country Ceiling is affirmed at 'A+' and the Short-term IDR at 'F2'. KEY RATING DRIVERS San Marino's 'BBB+' IDR reflects the following key rating drivers:- -San Marino's investment grade rating is underpinned by the country's high per capita income (close to USD60,000 at end-2013) and governance indicators which are more in line with 'AAA'-rated sovereigns, and its past track record of fiscal prudence. -Sovereign creditworthiness has, however, been weakened by the deep and protracted restructuring of the financial sector. Recapitalising the financial sector has cost the sovereign more than 10% of GDP and precipitated a prolonged recession. -Even if liquidity is improving (deposits slightly increased in 2013 after a 45% outflow in 2009-2012), asset quality remains weak and the consolidation of the banking sector is not yet completed (four banks were absorbed by other banks in 2012-2013). Credit growth remains negative. Over the medium term, the financial sector's future is highly uncertain: improved transparency and compliance with international regulations have reduced its attractiveness as an offshore financial centre, while a new business model has yet to emerge. -Public finances have been heavily affected by an intractable recession since 2008 (nominal GDP is 20% lower than its 2008 peak) and by the recapitalisation of the country's largest bank, Cassa di Risparmio della Repubblica di San Marino (CRSM). This has resulted in large headline fiscal deficits (8% of GDP in 2013 at the central government level, including 6% recapitalisation costs) and rising debt. The government has, however, not required external financial support, due to its initial solid fiscal position in 2008. -The extensive tapping of central government deposits since 2008 has contained the rise in public debt to an estimated 26.8% of GDP at end-2013, around 10% of GDP higher than in 2008, and to a moderate level compared with peers. The recent adoption of permanent tax reforms should improve fiscal deficits in coming years, but this will also depend on CRSM's future capital needs, which remain uncertain. -San Marino's small size, high economic volatility, weak economic outlook and untested capital market access argue for lower debt tolerance than peers. The recently improved liquidity of domestic banks, however, provides some moderate room for budget financing in coming years. As the last resort, the government can also tap (as it already did in 2012) social security deposits that accounted for around 27% of GDP at end-2013, should it need to recapitalise CRSM again in coming years. -The economic outlook remains uncertain. San Marino should benefit from its removal from Italy's black list of tax havens, which is expected in early 2014, but much of the output loss related to the banking sector shock is likely to be permanent. San Marino's economic performance will also remain closely linked to that of Italy (BBB+/Negative), where growth is expected to remain weak in coming years. -Despite some slight improvement, availability and quality of data remains weak, especially compared with peers. There is no high frequency data on national accounts and the balance of payments, while much recent data is estimated and could be subject to revision. RATING SENSITIVITIES The Negative Outlook reflects the following risk factors that may, individually or collectively, result in a downgrade of the ratings: -Poorer-than-expected performance of the domestic banking sector requiring substantial further recapitalisation by the sovereign -Deteriorating public finances over and above Fitch's current assumptions -Material delay in the economic recovery Because the Outlook is Negative, Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood, individually or collectively, of leading to an upgrade. However, future developments that may, individually or collectively, lead to a revision of the Outlook to Stable include: -Declining risk of further significant contingent liabilities materialising from the banking sector -Consolidation of public finances that results in stable public debt -An improvement in the economic outlook, for example, resulting from the removal of San Marino from Italy's black list of tax havens KEY ASSUMPTIONS Fitch assumes that recapitalisation costs for the government will be limited to CRSM over the rating horizon. Fitch forecasts a further EUR30m recapitalisation need in 2015. Fitch assumes there will be progress in deepening fiscal and financial integration at the eurozone level in line with commitments by eurozone policy makers. It also assumes that the risk of fragmentation of the eurozone remains low. Contact: Primary Analyst Amelie Roux Director +33 144 299 282 Fitch France S.A.S. 60 rue de Monceau, 75008 Paris Secondary Analyst Alex Muscatelli Director +44 20 3530 1695 Committee Chairperson Richard Fox Senior Director +44 20 3530 1444 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, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at 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. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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