RPT-Fitch: 2013 Performance Supports Spanish Regions' Ratings Floor

Fri Apr 4, 2014 3:04am EDT

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April 4 (Reuters) - (The following statement was released by the rating agency)

The improved operating performance by Spain's autonomous communities in 2013 is broadly in line with central government requirements, meaning that the central government will remain willing to provide timely liquidity support if needed, Fitch Ratings says. This willingness is reflected in the 'BBB-' ratings floor for Spanish autonomous communities, which we introduced last year.

Preliminary accounts for 2013, released by the Ministry of Finance and Public Administration, include a variety of fiscal data showing that the aggregate fiscal deficit narrowed to 1.26% of GDP. This is down from 2.23% a year earlier. The data set is complex and the accounts will not be finalised until later this year and may be adjusted, and several regions appear to have missed the individual deficit targets that central government set for the first time last July.

Nevertheless, these regions are also pursuing fiscal consolidation, and overall fiscal results have continued to improve. Even where individual fiscal targets have been missed, this does not affect the ratings floor, as we think that central government will recognise efforts to narrow deficits and reduce spending in 2013, in the face of almost flat operating revenues.

Falls in both capital and operating expenditure have reduced deficits. Staff costs in particular have fallen in recent years. However, a conversion of commercial liabilities into financial debt meant that 2012 accounts included spending from previous years that had not necessarily been reported. This helps account for the sharp (7.3%) drop in operating expenditure in 2013 versus the previous years.

Overall operating performance improved but remains weak, with an aggregate negative current balance. Only a small share at best of debt servicing (principal and interest payments), which represents 18% of the autonomous communities' aggregate 2014 budget, will be met from the operating balance, with greater reliance on additional debt issuance. This will add to pressure to cut operating expenditure further, which may be difficult given the extent of the cuts already made.

Nevertheless, we think that operating performance can continue to improve, and that central government will be satisfied with the decrease in operating and capital expenditures seen in 2013. The EUR23bn Regional Liquidity Fund (FLA) is available in 2014 to help the autonomous communities meet refinancing needs at reasonable cost if other funding sources are not available.

We also view the two-year old Budgetary Stability Law (BSL) as an important mechanism to help Spanish regions meet central government's fiscal targets. The FLA and BSL were both important factors in introducing our ratings floor.

Our full commentary on the results will be available in a Special Report to be published later this month. The report will be available at www.fitchratings.com.

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