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Fitch Affirms Autonomous Province of Bolzano at 'A'; Negative Outlook
February 24, 2017 / 5:07 PM / 9 months ago

Fitch Affirms Autonomous Province of Bolzano at 'A'; Negative Outlook

(The following statement was released by the rating agency) MILAN/LONDON, February 24 (Fitch) Fitch Ratings has affirmed the Italian Autonomous Province of Bolzano's (PAB) Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'A' and Short-Term Foreign Currency IDR at 'F1'.The Outlook is Negative. The affirmation reflects PAB's unchanged special autonomous status, which is constitutionally protected and provides the province with strong financial autonomy, in turn backing the province's sound and stable budgetary performance. The affirmation also factors in PAB's negligible direct debt, sophisticated budget management and wealthy socio-economic fundamentals. The Outlook reflects that of Italy. KEY RATING DRIVERS Autonomy Underpins Ratings Under Fitch's criteria, PAB is eligible to be rated above the sovereign (BBB+/Outlook Negative) by virtue of its institutional strength and high degree of financial autonomy. PAB's special autonomous status entitles the province to receive fixed shares of major national taxes, ranging from 90% personal income tax (PIT) and corporate income tax (CIT) to 80% of VAT. This underpins the province's tax revenue resilience and limits dependence on state transfers. Contributions to national consolidation efforts are subject to bilateral agreements and account for about EUR500m annually. The uplift above the sovereign's 'BBB+' rating is limited to two notches as it captures possible interference by the state in case of macroeconomic pressure or stressed sovereign finances with subsequent risks of weakening predictability of intergovernmental relations. Overall, Fitch views Italian inter-governmental relations as neutral to PAB. Solid and Stable Fiscal Performance Fitch expects PAB to have maintained solid and stable operating performance in 2016, despite new accounting rules affecting revenue/spending classification. Net of these changes Fitch expects PAB's operating margin to be around 32%, corresponding to EUR1.7bn, backed by sound tax revenue that accounts for 90% of operating revenue and constant control on costs. The province's health care budget remains balanced, with very high quality standard of services compared with the national average. Fitch expects PAB's medium-term budgetary performance to remain stable under the assumption of moderate cost increases (around 3% annually) and a solid tax base, despite progressively growing tax relief from the province. Large capital balance deficits are fully covered by operating surpluses as in the past. Sustainable Risks PAB's direct debt was EUR53.3m at end-2016, when EUR3.5m debt charged to the state was included. Guarantees issued to provincial companies are estimated to have declined to EUR293m in 2016 from EUR655m in 2015, following the expiry of some exposures to SEL spa. Fitch estimates net overall risk, which includes PSEs' and municipalities' debt as well as zero-interest bearing loans from the Region Trentino Alto Adige and from Bolzano's Chamber of Commerce (totalling EUR235m), to be around EUR1bn in 2016-2018, or 20% of operating revenue, which is still moderate compared with international peers. Resilient Economy PAB's economic robustness is mirrored in a GDP per capita that is at nearly 145% the EU average, with an unemployment rate below 4% (10.9% nationally) in 3Q16 and employment at 75% (57% nationally). Fitch expects GDP to have grown 1% in 2016 (0.8% in 2015), driven by manufacturing, exports (up 4.3% mainly foods and machinery towards EU countries) and tourism (up 6.4%), as well as constructions, which improved 0.2% in 2016 versus a further decline at the national level. This should underpin the province's strong tax revenue base and support investments and tax cut flexibility. Prudent Management Sustaining Economy Fitch views PAB's management as a strength, given prudent and conservative budgeting and debt management, with a tight control on municipalities' and subsidiaries' debt, as well as actuals regularly outperforming forecasts. Fitch expects PAB will maintain sufficient cost flexibility, which amounts to one-fifth of its budget in 2016, for unforeseen events in the medium term. RATING SENSITIVITIES PAB's IDRs move in parallel with those of Italy due to the province's strong standalone credit profile being constrained by the sovereign's rating. A rating action on Italy would translate into a corresponding rating action on PAB. A decline in the operating margin towards 10%-15%, due to a looser grip on spending or a sharp fall in revenue could be rating-negative. A downgrade could also be triggered by a loss of PAB's special status and, hence, of its autonomy or by mounting direct and indirect debt liabilities substantially beyond our expectations. Contact: Primary Analyst Federica Bardelli Associate Director +39 02 879087 261 Fitch Italia S.p.A. Via Morigi 6 - Ingresso Via Privata Maria Teresa, 8 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:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on 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=1019523 Solicitation Status here 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. 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