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Fitch Revises Outlook on San Marino to Stable; Affirms at 'BBB+'
July 11, 2014 / 8:15 PM / 3 years ago

Fitch Revises Outlook on San Marino to Stable; Affirms at 'BBB+'

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: San Marino - Rating Action Report here PARIS/LONDON, July 11 (Fitch) Fitch Ratings has revised the Outlook on San Marino's Long-term foreign currency Issuer Default Rating (IDR) to Stable from Negative and affirmed the IDR at 'BBB+'. The Country Ceiling has been affirmed at 'A+' and the Short-term foreign currency IDR at 'F2'. KEY RATING DRIVERS The revision of the Outlook to Stable reflects the following key rating drivers and their relative weights: High Macroeconomic prospects have improved after Italy lifted San Marino from its black list of tax havens. The prospect of normalised relations with its main trading neighbour should benefit growth and could help the country rebalance away from a badly damaged banking sector. After five consecutive years of a severe recession, Fitch expects real GDP growth to stagnate in 2014 and rise to 1% in 2015. Nevertheless, Fitch believes growth prospects will remain weaker than before 2008 due to lasting damage to the financial sector. Medium Cassa di Risparmio della Repubblica de San Marino's (CRSM) restructuring is well under way. The government injected 6.3% of GDP into the bank in late 2013 to reconstitute capital buffers. Although the full restructuring of the bank could take time, further capital needs, if any, are likely to be much smaller in coming years. Together with a structural tax reform implemented in late 2013 and aimed at further consolidating the budget deficit, this gives Fitch more confidence in the public debt trajectory in coming years, with a peak in sight within a two-year time horizon. San Marino's 'BBB+' IDRs also reflect the following key rating drivers:- San Marino's investment grade rating is underpinned by the country's high per capita income (close to USD60,000 at end-2013) and governance indicators which are more in line with 'AAA' rated sovereigns. Economic diversification is constrained by the small size of the country (around 30,000 inhabitants), making macroeconomic performance much more volatile than in larger countries. This exposes the country to a heightened risk of external shocks and, in the absence of a dynamic financial sector, constrains growth prospects over the medium term. The country has a track record of fiscal prudence, which mitigates weak financial flexibility. Despite recapitalisation costs worth more than 10% of GDP in the context of a deep and prolonged recession, the rise in public debt has been relatively contained with debt/GDP rising to 29% of GDP at end-2013 (2008: 13.5%). The government has been able to tap substantial deposits accumulated in years of fiscal surplus before 2008 to finance budget deficits. However, these deposits are now largely exhausted. The government has no history of external borrowing. Available liquidity in the domestic banking sector will likely cover government financing needs as they decline in the context of fiscal consolidation. As a last resort, the government can also tap (as it did in 2012) large social security deposits that accounted for 28% of GDP at end-2013. The domestic financial sector will remain a rating weakness in the foreseeable future. Progress on restructuring has been made: the size of the sector has shrunk to 4.5x GDP and liquidity has improved since 2012 after the outflow of deposits triggered by the 2010 Italian tax amnesty. However, asset quality remains a concern in most banks, and while capital buffers are above prudential requirements in all banks but CRSM, the cleaning up of the loan book will be long and painful, potentially further hampering credit growth in coming years. Over the medium term, prospects for the industry remain weak. Despite some slight improvement, availability and quality of data remains weak, especially compared with peers. There is no high frequency data on national accounts and no balance of payments data beyond the trade balance. Much recent data is estimated and subject to significant revisions. RATING SENSITIVITIES The Outlook is Stable. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change. However, the following risk factors may, individually or collectively, result in a positive rating action: - A diversification of the economy out of banking, leading to faster GDP growth than currently expected. - Faster progress in deficit reduction, therefore improving debt dynamics. - A broader improvement in the banking sector The following risk factors may, individually or collectively, result in a negative rating action: - Further large recapitalisation needs of domestic banks from the government, exceeding Fitch's current assumptions. - Weakening commitment or ability to reduce budget deficits and stabilise the public debt ratio. - Inability to diversify the economy out of the financial industry, leading to slower than expected growth. KEY ASSUMPTIONS Fitch assumes that recapitalisation costs for the government will be limited to CRSM over the rating horizon. Fitch assumes a further 2% of GDP recapitalisation cost in 2015. Fitch assumes the eurozone as a whole will avoid long-lasting deflation, such as that experienced by Japan from the 1990s. Fitch assumes the gradual progress in deepening fiscal and financial integration at the eurozone level will continue; key economic imbalances within the currency union will be slowly unwound; and eurozone governments will tighten fiscal policy over the medium term. Contact: Primary Analyst Amelie Roux Director +33 144 299 282 Fitch France S.A.S. 60 rue de Monceau 75008 Paris Secondary Analyst Alex Muscatelli Director +44 20 3530 1695 Committee Chairperson Richard Fox Senior Director +44 20 3530 1444 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, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings 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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