(Repeat for additional subscribers)
May 14 (The following statement was released by the rating agency)
Weak fiscal performances and outlooks are constraining the ratings of Spain's autonomous
communities, despite the improvement in the Spanish sovereign credit profile, Fitch Ratings
says. In particular, the sector's negative current balance highlights structural imbalances for
some regions. Hence there was no impact on our ratings of the autonomous communities
following our upgrade of the Spanish sovereign to 'BBB+' in April. Our ratings
floor, indicating probable sovereign support, remains in place.
Upgrades to Fitch-rated autonomous communities would be driven by a sustained
improvement in credit fundamentals, or a rise in the ratings floor from 'BBB-'.
As long as the mechanisms by which the sovereign can provide support remain
largely unchanged, the latter is unlikely, even if the sovereign is upgraded
Preliminary results for last year show a weak, albeit improving, overall
operating performance by the Spanish regions. Operating expenditure exceeded
operating revenue for the fourth consecutive year and the aggregate current
balance remained negative, although both shortfalls were considerably smaller
than in 2012. Six regions had positive current balances, but all of these had
weak current margins. Four regions had negative current balances exceeding 10%
of current revenue.
While aggregate operating performance and fiscal outturns are improving, the
current balance indicates a region's capacity to fund recurrent spending.
Repeated negative current balances mean debt repayment must be funded from debt
issuance, and this is a structural problem for several regions. Further spending
cuts may prove more challenging without reforms in areas such as healthcare and
spending. Meanwhile tax allocations from central government will fall this year,
and several autonomous regions are budgeting for a negative current balance in
2014 as a result.
Despite this recurrent weakness, we think the improvement so far is in line with
the expectations of central government, which therefore remains willing to
provide timely liquidity support if needed. The maintenance of our ratings floor
The floor is unchanged at 'BBB-' following the sovereign upgrade. An investment
grade floor is based on supporting factors such as the EUR23bn Regional
Liquidity Fund (FLA) and the Budgetary Stability Law (BSL), both introduced in
2012, as well as the legal priority given to debt servicing, and the
government's decision to allow a negative tax settlement to be repaid over 10
years. The BSL has not been applied as rigorously as anticipated, but we think
it provides a useful mechanism to help the regions meet central government
targets. If these factors were strengthened, the floor could rise.
The floor would be sensitive to a downgrade of the sovereign to 'BBB-' or below.
Six Fitch-rated autonomous communities are rated at this level, and four at
'BBB'. For the 'BBB' rated autonomous communities, we consider that there has
been no material structural improvement in financial performance, and none is
expected in the near future.
Outlooks on 10 of our 11 ratings in the sector are Stable, and one is Negative.