Fitch Affirms Autonomous Community of Catalonia at 'BBB-'; Outlook Stable

Fri Jan 24, 2014 11:44am EST

BARCELONA/PARIS/LONDON, January 24 (Fitch) Fitch Ratings has affirmed the Autonomous Community of Catalonia's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-'. The Outlooks for the Long-term IDRs are Stable. Fitch has also affirmed the Short-term foreign currency IDR at 'F3'. Its EMTN programme and bond issues have been affirmed at ‘BBB-’. KEY RATING DRIVERS Catalonia’s ratings are supported by the rating floor that Fitch has introduced for all Spanish regions, at one notch lower than the Spanish sovereign of ‘BBB’/Stable. The floor for Spanish regions is based on a number of supporting factors, which improve liquidity and reduce the likelihood of default by a region. These include the recent budgetary stability law, the absolute priority of debt servicing by law as per article 135 of the Spanish Constitution, the existence of the Fondo de Liquidez Autonomico or FLA (the regional liquidity fund), and the fact that negative tax settlements can now be paid over a 10-year period, easing liquidity for Spanish regions. Catalonia’s standalone credit metrics are weaker than its ratings would indicate due to structural negative current balances since 2008. Without the floor, Catalonia’s ratings would likely fall to the ‘BB’ category. Fitch expects the region to report smaller negative operating and current balances over the next two years. Catalonia reported a budget deficit of EUR4,858m in 2012, higher than the deficit target of 1.5% of regional GDP. Notwithstanding the austerity measures adopted since the beginning of 2013, Catalonia is unlikely to have met the deficit target for 2013 of 1.58% of regional GDP. Nevertheless, Fitch believes that the state will maintain its financial support as long as there are demonstrated efforts to reduce the deficit. In 2013 the region requested a total of EUR10,838m through the FLA. Of this, EUR2,172m was to cover the 2013 deficit and the rest for debt repayment. Total direct debt rose to EUR48,131m in 2013 from EUR42,791m in 2012 and the region faces maturities of EUR9,072m for this year. Fitch expects debt to continue rising but at a slower pace and forecasts debt will be at 25% of its regional GDP for 2014, which is below the target of 28% set by the central government in July 2013. In common with Spain, the region of Catalonia has suffered a severe decline in its economy and prospects for a recovery in 2014 are weak with limited opportunities for job creation. The unemployment rate according to a labour survey was 22.3% in 4Q13, compared with 26% for Spain. Nevertheless, external demand has helped compensate for weak domestic demand during 2013, and exports continue to be one of the region’s economic drivers. RATING SENSITIVITIES Fitch will review the rating floor if the underlying support measures are removed or diminished or if there is doubt as to the central government’s ability and the willingness to continue to provide extraordinary support to Spanish regions. KEY ASSUMPTIONS Fitch assumes that the liquidity mechanism introduced by the central government for Spanish regions will be extended beyond 2014, if borrowing remains difficult. Fitch also believes that despite political tension between the central and regional government due to Catalonia’s separatism movement, we remain confident of potential support from the central government if required. Additionally, a new regional funding system is under review, but it is too early to judge the outcome and its impact on Catalonia. Contacts: Primary Analyst Ines Callahan Associate Director +34 93 467 8745 Fitch Ratings Espana, S.A.U. Paseo de Gracia, 85, Barcelona 08008 Secondary Analyst Guilhem Costes Senior Director +34 93 323 8410 Committee Chairperson Christophe Parisot Managing Director +33 1 44 29 91 34 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 the United States", dated 9 April 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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