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Fitch Affirms Historical Territory of Gipuzkoa at 'A'; Outlook Stable
September 30, 2016 / 6:11 PM / in a year

Fitch Affirms Historical Territory of Gipuzkoa 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 Gipuzkoa's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'A' with Stable Outlooks and Short-Term Foreign Currency IDR at 'F1'. The ratings reflect the province's continued balanced budget 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 Gipuzkoa 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 Gipuzkoa'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 solid financial reporting. In common with the other two Basque provinces, Gipuzkoa 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 fiscal receipts have to be transferred to other tiers of government as per an established agreement with the central government. Consistent Fiscal Performance The province has reported stable fiscal performance over the past five years, with an operating balance averaging 3.2% over 2011-2015. We expect this trend to continue, as more than 80% of operating spending are expenditure transfers that are correlated with tax revenues, enhancing the predictability of the performance. The 2015 accounts showed a surplus before debt of EUR17.5m, mainly driven by expenditure transfer (EUR48m) being below the budget, stable tax revenues on the back of solid local economic growth above 3% and efficient tax collection. Under Fitch's base case scenario, Gipuzkoa's operating margin will be 3.5%-4% over 2016-2017, driven by GDP growth of 2%-3%. The region's financial flexibility to adjust operating and capital spending to revenue levels in order to avoid deficits is also credit-positive. Solid Debt Coverage The province actively manages its debt, consisting of EUR277m in long-term credit lines and EUR282m in long-term loans as of end-2015. The debt burden is a low 12.4% of current revenues, which is further underpinned by healthy liquidity. The province refinanced EUR62m of long-term debt in 2016, with an average 0.94% interest and a 10-year maturity. Debt amortisation peaks at EUR54m in 2016, and should decline thereafter. Gipuzkoa has allocated EUR8.8m to a sinking fund for a EUR61.7m bullet loan redemption in 2022. The administration's policy is to reduce overall debt. Fitch expects Gipuzkoa's operating balance to cover more than twice the region's debt service requirements, and direct debt-to-current balance to remain below four years over 2016-2017. Contingent liabilities are concentrated in Bidegi, a road construction and maintenance entity, amounting to EUR473m at end-2015, and are expected to decline to around EUR30m a year over 2016-2017 as debt amortises. Strong Economy Gipuzkoa is a wealthy province by national and international standards, with GDP per capita estimated in 2013 at 33.4% above the Spanish average. It also has one of the lowest unemployment rates in Spain, at 12.7% against 22% nationally in 2015. The industrial sector represents 28.3% of GDP, with a focus on high-value added manufacturing and technological sectors. Population grew 0.7% over 2012-2015, contrasting with a 1.3% decline in Spain. RATING SENSITIVITIES In the currently recovering economic environment, an improvement of the operating margin to 10% could lead to an upgrade of the province's IDRs. A downgrade may result from substantial deterioration in budgetary performance such that, for instance, the operating balance is unable to cover annual debt service requirements. A downgrade of the sovereign would lead to a downgrade of Gipuzkoa. 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. 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 _id=1012499 Solicitation Status here Endorsement Policy here ail=31 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. 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