October 27, 2017 / 8:38 PM / a year ago

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

(The following statement was released by the rating agency) MILAN/PARIS/LONDON, October 27 (Fitch) Fitch Ratings has affirmed the Italian Region of Veneto's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB' and Short-Term Foreign Currency IDR at 'F2'. The Outlook is Stable Veneto's ratings reflect the region's moderate debt, a solid liquidity position amid stable, albeit low by international standards, operating performance, including a continuing balanced health care sector. The ratings also reflect a wealthy socio-economic profile, which underpins the region's solid tax base. Fitch does not see any major impact on Veneto's IDR in the medium-term from the referendum on 22 October voting for greater autonomy. KEY RATING DRIVERS Ratings Constrained by Sovereign: Veneto's IDR is constrained by Italy's IDR (BBB/Stable). This reflects the cap at the sovereign rating for ordinary statute regions, as they lack the financial autonomy to isolate their finances from the national government and make them eligible for a rating higher than the sovereign one. Following a recent referendum, the region intends to start negotiation with the national government to obtain additional responsibilities, as allowed by Italian Constitution, in exchange for extra resources. Fitch believes it will be a lengthy process, with neutral effects on the ratings in the medium term. Veneto benefits from national state support, such as transfers, equalisation system, subsidised loans and extraordinary support in case of unpredictable events. On the other hand, the region has to contribute to Italy's consolidation efforts to balance the national accounts, with repeated revenue curtailments and spending reviews. As a result, Fitch views inter-governmental relations as neutral to Veneto's ratings. Stable Operating Performance: According to Fitch's central scenario, Veneto's operating balance will remain stable at around 3% of revenue, due to a resilient tax base and continued tight cost control. This will ensure solid debt servicing coverage by operating balance (around 70%) and a debt payback (direct debt-to-current balance) of around 12 years, approximately matching the average life of the regional debt. Fitch estimates new investments will remain at around a modest 5% of total spending, or EUR600 million per year, mostly funded by capital transfers. As a result the region should be able to maintain a balanced budget through a prudent combination of low debt and non-debt resources. Modest Debt, Sound Liquidity: Veneto's debt, including EUR1.5 billion borrowings subsidised by the national government and a state-funded loan (about EUR25 million), amounted to EUR2.6 billion at end-2016, and Fitch expects it to remain moderate in 2017-2019 at around 25% of revenue, with sound debt ratios supported by stable operating performance. Veneto's cash position totalled EUR1.3 billion at end-2016, and Fitch expects it to remain sound over the medium term (averaging EUR1.2 billion over the past five years), providing a buffer against possible mismatches between temporary inflows and outflows. However, Fitch expects it may weaken over the medium term as the relaxation of capital spending rules by the national government could lead to the region carrying out committed investments. Conservative Financial Policies: The administration continues to be committed to preserving the region's stable operating performance and a balanced budget, including the healthcare sector, which absorbs more than 80% of the budget, and to shrink its fund balance deficit. The latter represents a moderate 15% of the regional budget as calculated by Fitch, albeit covered by borrowings not yet drawn down. The region plans to raise EUR300 million in new debt in 2018-2019 to finance a regional toll highway, Pedemontana, to be completed by 2021. Veneto retains broad fiscal leeway of about 10% of revenue to protect its budget from any eventual mismatch between collected fees and concession lease to be paid for 39 years. Resilient Economy: With GDP growth faster than Italy's (1.2% in 2016 vs. 0.9% at the national level), Veneto remains among the richest ordinary statute regions of Italy, due to a well-diversified economy focused on industry (fashion, mechanics, engineering, food and beverage), tourism and exports. Regional exports represent 14.1% of total national exports (second after Lombardy, with 27.2%), with solid growth of agribusiness (up 7% in 2016 and 10.4% in 1Q17), while tourism remained a strong contributor to the economy (9% of regional GDP, with 3.5% yoy growth in 2016). Fitch expects GDP growth in 2017 will be in line with our estimate on Italy, at 1%-1.3%, driven by exports and tourism. Unemployment, traditionally below the national average, should stabilise at around 7% (Italy: 11.7% in 2016) with an employment rate of 65% (64.7% in 2016 and 65.3% in 1H17). This will help sustain the regional tax base. RATING SENSITIVITIES As Veneto's IDRs are constrained by those of Italy, a rating action on the sovereign would lead to a corresponding rating action on Veneto. Veneto's IDRs could also be downgraded if the region's fundamentals weaken with the current margin turning negative on a sustained basis amid a widening fund balance deficit. Contact: Primary Analyst Federica Bardelli Associate Director +39 02 879087 261 Fitch Italia S.p.A. Via Morigi 6 Milan 20123 Secondary Analyst Gian Luca Poggi Director +39 02 87 90 87 293 Committee Chairperson Christophe Parisot Managing Director +33 1 44 29 91 34 Media Relations: Stefano Bravi, Milan, Tel: +39 02 879 087 281, Email: stefano.bravi@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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