December 15, 2017 / 9:25 PM / a year ago

Fitch Affirms Italian Region of Calabria at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) MILAN/BARCELONA, December 15 (Fitch) Fitch Ratings has affirmed the Italian Region of Calabria's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB' with Stable Outlooks and Short-Term Foreign-Currency IDR at 'F2'. The affirmation reflects the region's modest operating performance and Fitch's expectations of low debt. The Stable Outlook reflects the evenly balanced risks of a weaker operating margin resulting from accelerated spending, including in the healthcare sector after years of spending rationalisation, and of a stronger operating margin following higher-than-expected budget allocations from the national government or a stronger economic recovery. KEY RATING DRIVERS Fiscal Performance (Weakness) Fitch expects Calabria's operating performance to remain within our expectations of a 2%-3% adjusted operating margin, or about EUR150 million in 2017-2019, similar to the ratios in 2015/2016 when netted of uncollected taxes and unspent transfers. Stability remains contingent on spending restraint as revenue remains rigid due to continued curtailment of national allocations and an enfeebled economy. Possible revenue inflows from a crackdown on tax evasion may fund one-off costs from delayed payment of past commercial liabilities in the healthcare sector. Fitch believes that operating spending may edge higher over the medium term from EUR4.6 billion in 2016, due to growth both in salaries, after years of wage freeze, and in pharmaceuticals. The subsequent expected fall in the healthcare sector surplus to close to EUR25 million from 2017, versus EUR50 million (1% of operating revenue) in 2015 will be offset by lower cost for healthcare (patients) mobility outside the region. Fitch expects Calabria's budget to be roughly balanced over 2017-2020 as national and EU transfers largely fund the region's EUR6 billion capex for transport, hospitals and economic development to narrow the infrastructure gap with other more developed regions in Italy and Europe. Debt and Liquidity (Strength) Fitch expects Calabria's debt to remain close to EUR1.5 billion or one-third of current revenue, all at fixed rate and with an amortising structure. Liquidity is weakening somewhat as the waste recycling responsibility taken over from municipalities in 2015-2017 depletes reserves by about EUR300 million. The region pays for the costs but only collects about 20% of the EUR110 million tax due from the municipalities. However, liquidity remains satisfactory, covering annual interest and principal repayments of about EUR115 million without drawing down liquidity bank lines. Management (Neutral) Calabria continues to target free reserves at about 1% of the budget, or 5% by Fitch's calculation, which excludes the "residui perenti", commitment, as this could be debt-funded in future from the fund balance. The conservative approach of the core administration is offset by weak administrative capacity in some of the region's healthcare units, which took about five years to pay off the EUR2 billion of commercial liabilities outstanding in 2013. Payment delay has now improved with invoices in the healthcare and other sectors being paid closer to the standard 60 days from the date of issue. Economy (Neutral) Fitch expects the Calabrian economy to grow about 1% in 2017 and 1.5% over 2018-2019 on the back of increasing tourist flows (5% yoy in 2015-2017) and regional capex doubling to near EUR2 billion per year in 2017-2019. Fitch expects spending to upgrade the socio-economic infrastructure to add up to 3pp to Calabria's low 40% employment rate. With a GDP of nearly EUR33 billion and a population of two million Calabria's socio-economic wealth indicators are below the EU average. Fitch expects the unemployment rate to remain close to 20% over the medium term, despite the resumption of public works such as in the transport sector, lower corporate debt and rising profit margins of local businesses, and falling non-performing loans. Economic growth, however, has only a modest impact on regional revenue as resources for healthcare, which account for nearly 80% of Calabria's budget, are largely funded by the national government to compensate for weaker fiscal capacity and raise health services close to national standards. Institutional Framework (Neutral) Fitch assesses Italian inter-governmental relations as neutral to the ratings. Sub-nationals with a weak economic base, such as Calabria, receive transfers to raise service provisions to national standards. However, this predictability is offset by weak enforcement of prudential regulation to preserve fiscal balance, which at times leads to off-balance sheet liabilities. Amortising debt structures and repayment of financial debt in priority over commercial liabilities as required by national legislation underpin timely debt servicing even during liquidity stress. RATING SENSITIVITIES A stronger economic recovery leading to a sustained recovery of the employment base underpinning tax-raising flexibility, coupled with an improvement in the region's operating margin towards 5% on Fitch's calculation could benefit only the region's intrinsic credit profile since Calabria's IDR cannot be higher than Italy's (BBB/Stable). Relaxation of spending amid rigid revenue leading to debt servicing requirements not being fully covered by operating balance could result in a downgrade. Contact: Primary Analyst Raffaele Carnevale Senior Director +39 02 879087 203 Fitch Italia S.p.A. Via Morigi 6 - Ingresso Via Privata Maria Teresa, 8 20123 Milan Secondary Analyst Gian Luca Poggi Director +39 02 879087 289 Committee Chairperson Guilhem Costes Senior Director +34 93 323 8410 Media Relations: Stefano Bravi, Milan, Tel: +39 02 879 087 281, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy 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 WEB SITE AT WWW.FITCHRATINGS.COM. 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