September 30, 2016 / 6:06 PM / a year ago

Fitch Affirms Historical Territory of Bizkaia at 'A'; Outlook Stable

(The following statement was released by the rating agency) BARCELONA, September 30 (Fitch) Fitch Ratings has affirmed the Historical Territory of Bizkaia's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'A' with Stable Outlook. Fitch has also affirmed the Short-Term Foreign Currency IDR at 'F1'. The affirmation reflects the province's ability to report strong fiscal performance and stable debt levels. The Stable Outlook reflects that of Spain (BBB+/F2/Stable), as the province is presently rated at the maximum level above the sovereign. KEY RATING DRIVERS Fiscal Autonomy Supports Rating Uplift Bizkaia can be rated higher than the Spanish sovereign because of its financial and fiscal autonomy as recognised by the Spanish Constitution, which mitigates sovereign unilateral interferences in the province's activities. The ratings reflect Bizkaia's special status, strong socio-economic profile, proven ability to maintain stable operating performance, and solid debt coverage. The ratings also take into account the province's prudent management and satisfactory financial reporting. In common with the other two Basque provinces, Bizkaia has a special legal and fiscal status, which is explicitly recognised by the Spanish Constitution. Under this regime, the provinces benefit from a special tax arrangement, whereby they have wide fiscal powers, are entitled to levy and collect taxes in the province and have the authority to set rates on a number of taxes, primarily personal income tax. This gives the provinces strong fiscal flexibility and is a positive rating factor. Nevertheless, some of the tax receipts have to be transferred to other tiers of government as per an established agreement with the central government. Resilient Fiscal Performance The province has historically reported strong fiscal performance, although in 2015 its operating margin declined to 5.1% from 7.6% a year ago, as Bizkaia had to return taxes to the national government. For 2016-2017, Fitch's base case scenario projects that the operating margin will be 6%-7%, driven by tax revenue increase, notably VAT, as economic activity continues to improve. Preliminary August 2016 data indicates a 7.4% growth yoy on VAT. The May 2015 election saw the PNV retaining control of the provincial government, with policy continuity from the previous government. Following cost-cutting measures in 2009-2015, the 2016 budget is forecasting a 3.6% increase in operating expenditure, on the back of firmer economic performance. Bizkaia's ability to control expenditure and raise revenue, to avoid operating and overall deficits, is a credit-strength. Solid Debt Coverage Bizkaia kept debt stable at EUR1.2bn over 2014-2015, which Fitch expects to continue over the medium term. Despite the fiscal deterioration in 2015 Bizkaia still reported a comfortable debt payback ratio of 3.7 years, and the province's expected current balance over 2016-2017 is more than 2x debt repayments. In addition, Bizkaia's liquidity is strong due to direct collection of tax and the province's available cash is sufficient to cover three years of debt amortisation. Strong Economy Bizkaia is a wealthy province by national and international standards, with a GDP per capita estimated at least 20% above the Spanish average. It has an estimated population of 1.15 million, largely concentrated around its capital, Bilbao. Its population started contracting in 2012, in line with Spain, falling 0.8% over 2012-2015. GDP was estimated at EUR32.7bn in 2015, and is characterised by a large manufacturing sector, with a share of around 15%. We expect the number of registered worker to grow 2.5%-3% in 2016. RATING SENSITIVITIES An improvement of the operating margin to 10% could lead to an upgrade of its IDRs. An upgrade of the sovereign would lead to an upgrade of Bizkaia. A downgrade may result from substantial deterioration in budgetary performance, such that, for instance, the operating balance is not able to cover annual debt service requirements. Contact: Primary Analyst Patricio Novales Analyst +34 93 323 8417 Fitch Ratings Espana, S.A.U. Paseo de Gracia, 85, Barcelona 08008 Secondary Analyst Guilhem Costes Senior Director +34 93 323 8410 Committee Chairperson Christophe Parisot Managing Director + 33 1 44 29 91 34 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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