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RPT-Fitch: Fiscal Weakness Still Constrains Spanish Regions' Ratings
May 14, 2014 / 7:04 AM / 4 years ago

RPT-Fitch: Fiscal Weakness Still Constrains Spanish Regions' Ratings

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May 14 (Reuters) - (The following statement was released by the rating agency)

Weak fiscal performances and outlooks are constraining the ratings of Spain’s autonomous communities, despite the improvement in the Spanish sovereign credit profile, Fitch Ratings says. In particular, the sector’s negative current balance highlights structural imbalances for some regions. Hence there was no impact on our ratings of the autonomous communities following our upgrade of the Spanish sovereign to ‘BBB+’ in April. Our ratings floor, indicating probable sovereign support, remains in place.

Upgrades to Fitch-rated autonomous communities would be driven by a sustained improvement in credit fundamentals, or a rise in the ratings floor from ‘BBB-'. As long as the mechanisms by which the sovereign can provide support remain largely unchanged, the latter is unlikely, even if the sovereign is upgraded further.

Preliminary results for last year show a weak, albeit improving, overall operating performance by the Spanish regions. Operating expenditure exceeded operating revenue for the fourth consecutive year and the aggregate current balance remained negative, although both shortfalls were considerably smaller than in 2012. Six regions had positive current balances, but all of these had weak current margins. Four regions had negative current balances exceeding 10% of current revenue.

While aggregate operating performance and fiscal outturns are improving, the current balance indicates a region’s capacity to fund recurrent spending.

Repeated negative current balances mean debt repayment must be funded from debt issuance, and this is a structural problem for several regions. Further spending cuts may prove more challenging without reforms in areas such as healthcare and spending. Meanwhile tax allocations from central government will fall this year, and several autonomous regions are budgeting for a negative current balance in 2014 as a result.

Despite this recurrent weakness, we think the improvement so far is in line with the expectations of central government, which therefore remains willing to provide timely liquidity support if needed. The maintenance of our ratings floor reflects this.

The floor is unchanged at ‘BBB-’ following the sovereign upgrade. An investment grade floor is based on supporting factors such as the EUR23bn Regional Liquidity Fund (FLA) and the Budgetary Stability Law (BSL), both introduced in 2012, as well as the legal priority given to debt servicing, and the government’s decision to allow a negative tax settlement to be repaid over 10 years. The BSL has not been applied as rigorously as anticipated, but we think it provides a useful mechanism to help the regions meet central government targets. If these factors were strengthened, the floor could rise.

The floor would be sensitive to a downgrade of the sovereign to ‘BBB-’ or below. Six Fitch-rated autonomous communities are rated at this level, and four at ‘BBB’. For the ‘BBB’ rated autonomous communities, we consider that there has been no material structural improvement in financial performance, and none is expected in the near future.

Outlooks on 10 of our 11 ratings in the sector are Stable, and one is Negative.

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