Fitch Affirms Autonomous Community of Asturias at 'BBB'; Outlook Stable

Fri Aug 22, 2014 2:09pm EDT

(The following statement was released by the rating agency) LONDON/BARCELONA/MILAN, August 22 (Fitch) Fitch Ratings has affirmed the Spanish Autonomous Community of Asturias's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB' with Stable Outlook. Fitch has also affirmed the Short-term foreign currency IDR at 'F2.' The rating action affects EUR2.5bn of outstanding debt. KEY RATING DRIVERS The affirmation and Stable Outlook reflect Fitch's expectations that Asturias's operating performance will continue to improve over the medium term. The agency forecasts that operating margin will slightly rise to 4%-5% in 2015 and 2016, from 3% in 2013, as revenues recover. Under Fitch base case scenario, Fitch assumes direct debt to continue rising modestly until 2016 before stabilising. Fitch expects the recovery in operating revenue in 2015 and 2016 to be driven by an improvement of the national economy, with a forecasted real GDP growth of 1.4% and 1.5% for 2015 and 2016. The agency expects operating expenditure to slightly rise over the next three years, after the austerity measures had resulted in a cumulative decline of operating expenditure in Asturias of 10% between 2009 and 2013. Regional socio-economic indicators are in line with the national average and are expected to recover as the national economy improves. Its GDP per capita is equivalent to 93.5% of the national level and its unemployment rate in 2013 was 24%, below the national average of 26%. The higher proportion of the elderly population relative to the national average has resulted in an increase in the number of pensions in the region, resulting in greater stability of personal income tax revenue. However, it also means that spending on healthcare per capita is higher, at an estimated at EUR1,681 in 2012 compared with EUR1,370 for the national average. House prices are 8% below the Spanish average and as many as 12 thousands new houses are still pending sale in Asturias, representing 1.9% of the regional stock, which is in line with the national average. Asturias reported a smaller negative current balance of EUR4.5m in 2013, or 0.15% of current revenue, versus the negative balance of EUR308.9m in 2012, which reflected a one-off integration of EUR243m of past liabilities. The regional government intends to comply with deficit reduction targets, as illustrated by a reduction in current transfers to Asturias's public sector entities (PSEs), and cuts in staff costs (5%) and in goods and services (11%) between 2011 and 2013. Direct debt is expected to continue rising in the medium term but at a slower pace at EUR3bn-EUR3.3bn between 2014 and 2015. At end-2013, debt contracted under state support mechanisms represented 34% of outstanding direct debt. Asturias faces fairly high debt repayment over the next three years of 41.3%. Under Fitch's assumptions, the current balance would cover 13%-16% of debt repayment in 2016. In December 2013, the central government approved the State Law 9/2013 to control commercial debt, which requires public administrations to pay their suppliers within 60 days of the receipt of the invoice. This underlines stricter control of regional finances by the central government, allowing it to intervene if the regional administration fails to comply. State support is illustrated in the central government's recent further measures to ease liquidity for autonomous communities that had made use of the Regional Liquidity Fund. The repayment period was extended to 11 years and interest rates debt contracted in 2012 were reduced to 1% from 5.18%, easing liquidity and interest repayments. RATING SENSITIVITIES An upgrade may result from an improvement in the operating margin to 5%-6% in 2015-2016, and stabilisation of debt. The ratings could also be downgraded if Asturias continues to report a negative current balance beyond 2016 or if debt increase exceeds Fitch's expectations. ASSUMPTIONS A new financial system is under debate but it is too early to assess the positive impact for Asturias. Fitch does not factor so far in any change from the funding system or changes from fiscal reforms. Fitch also assumes that operating expenditure will grow in the medium term. Contacts: Primary Analyst Julia Carner Analyst +34 93 323 8401 Fitch Ratings Espana, S.A.U. Paseo de Gracia, 85, Barcelona 08008 Secondary Analyst Guilhem Costes Senior Director +34 93 323 8410 Committee Chairperson Raffaele Carnevale Senior Director +39 02 87 90 87 203 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 23 April 2014 are available at www.fitchratings.com. Applicable Criteria and Related Research: Tax-Supported Rating Criteria here International Local and Regional Governments Rating Criteria - Outside the United States here Additional Disclosure Solicitation Status here ALL 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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