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Fitch Affirms Autonomous Community of Andalusia at 'BBB-'; Outlook Stable
April 21, 2017 / 8:19 PM / in 6 months

Fitch Affirms Autonomous Community of Andalusia at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) BARCELONA/LONDON, April 21 (Fitch) Fitch Ratings has affirmed the Autonomous Community of Andalusia's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB-' with Stable Outlooks. Fitch has also affirmed the Short-Term Foreign-Currency IDR at 'F3'. Fitch has also affirmed the 'BBB-' ratings on Andalusia's outstanding senior unsecured bonds and the 'BBB-' and 'F3' ratings on Andalusia's commercial paper (pagares) programme. The affirmation reflects Andalusia's still weak but improving fiscal performance, a moderately high direct debt burden and financial support from the central government. The IDRs are no longer supported by the 'BBB-' floor for Spanish regions but based on the issuer's credit metrics. The Stable Outlook incorporates Fitch's expectations that the region's fiscal performance will gradually improve, with direct debt stabilising at around 140% of current revenue in 2017 (143.9% in 2016). KEY RATING DRIVERS Expected Operating Performance Improvement Operating performance improved in 2016 according to preliminary results, and Andalusia posted a positive operating margin of 1.4% (for the first time since 2010), backed by higher revenues from the financial system of around EUR1.5 billion, equivalent to 7.9% of 2015's operating revenues. It has also met the 0.7% fiscal deficit financial goal set by the Budgetary Stability Law for the year, posting an overall fiscal deficit of 0.65%. Fitch expects this trend to be sustained over the medium term, as economic growth rates above 3% over 2015-2016 in Spain translated into enhanced tax revenue collection. These will be transferred to the regions with a two-year lag given the singularities of the regional funding scheme in Spain. The resources from the financial system are EUR0.8 billion higher in 2017 vs. 2016 for Andalusia, mainly from higher current transfers. The region's operating margin will range between 2%-3% over 2017-18 under Fitch's base case scenario, accompanied by a small current margin below 1%. We also expect Andalusia to meet the fiscal deficit goal of 0.6% GDP in 2017. Central Government Support The region held EUR22.5 billion in debt from state liquidity mechanisms at end-2016, close to 70% of its total debt, illustrating strong support from the central government. This includes the Regional Liquidity Fund (FLA), which was established in 2012 by the central government to support Spanish regions facing difficulties in accessing capital markets; and the Supplier's Fund (FFPP), a mechanism implemented to help regions pay their arrears to suppliers. Debt contracted under these mechanisms is repaid evenly over 10 years. Under Fitch's base case scenario, Andalusia's funding needs of EUR4.4 billion in 2017 are reliant on FLA financing. This access to state support will continue to ensure timely debt servicing, as the region faces high redemptions over the next three years, which at end-2016 exceeded 30% of outstanding debt. Direct Debt Stabilisation Fitch estimates Andalusia's direct debt to have grown further in 2016 to EUR31.9 billion, from EUR30.1 billion in 2015. Fitch expects it to grow towards EUR33 billion over the medium term. However, its relative weight over current revenue is likely to have peaked in 2016 at 143.6%. The favourable state liquidity, to be lent at an average interest rate of 0.6% in 2017, will maintain a low debt burden despite the high nominal debt. Recovery of Regional Economy Andalusia has a weaker economic profile than Spain, with a GDP per capita equivalent to 74% of the national average, although this is average by international standards. However, GDP grew 3.2% in 2016, slightly below Spain's 3.6%. Fitch expects the figure to be above 3% over 2017-2018, underpinning the region's budgetary performance. The labour market has also improved as unemployment decreased to 28.9% in 2016 (Spain: 19.6%), from 31.5% in 2015. The regional government is implementing a number of programmes to address the informal economy and foster the labour market, which will be positive for revenues. RATING SENSITIVITIES Direct debt exceeding 150% of current revenue, or a negative operating balance, may weaken Andalusia's credit profile, but the IDRs will be unchanged provided that the floor support at 'BBB-' is maintained. The ratings could be upgraded if the regional government reports a structural positive current balance and a decline in direct debt below 130% of current revenue, associated with a sustained recovery of socio-economic indicators. KEY ASSUMPTIONS Fitch assumes that the state will continue providing support to the Spanish autonomous communities over the medium term, in particular, through the liquidity mechanism. Discussions on the regional financial system are ongoing in Spain, and changes are in prospect over the medium term. However, Fitch does not factor such changes into Andalusia's IDRs. Contact: Primary Analyst Patricio Novales Associate Director +34 93 323 8417 Fitch Ratings Espana. S.A.U. Avda. Diagonal, 601, Barcelona 08028 Secondary Analyst Guilhem Costes Senior Director +34 93 323 8410 Committee Chairperson Christophe Parisot Managing Director +33 1 44299134 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 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#solicitation 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. 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. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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