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Fitch Affirms Italian Region of Calabria at 'BBB'/Stable
December 16, 2016 / 6:16 PM / a year ago

Fitch Affirms Italian Region of Calabria at 'BBB'/Stable

(The following statement was released by the rating agency) MILAN/BARCELONA, December 16 (Fitch) Fitch Ratings has affirmed the Italian Region of Calabria's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB' and Short-Term Foreign Currency IDR at 'F2'. The Outlooks are Stable. The affirmation reflects the region's weak operating performance and Fitch's expectations of low debt. The Stable Outlook reflects the evenly balanced risks of a weaker operating margin resulting from accelerated spending, including in the healthcare sector after years of spending rationalisation, and of a stronger operating margin following higher-than-expected budget allocations from the national government or a stronger economic recovery. KEY RATING DRIVERS Fiscal Performance (Weakness) Calabria's budgetary performance is likely to remain within our expectations with a 2% adjusted operating margin, or about EUR100m for 2015-2017. Stability of performance is contingent on spending restraint, including the rationalisation of the transport sector and health care expenditure -growing in line with 1%-2% state allocations. After years of public salary freeze, which represented a third of operating costs, Fitch believes operating spending may edge higher over the medium term from EUR3.4bn in 2011-2015. With national and EU subsidies largely funding the region's EUR7bn capex for transport, hospitals and economic development to narrow a sizable infrastructure gap with other more developed regions in Italy, Fitch expects Calabria's budget to be roughly balanced over 2016-2020. This is after adjusting for the use of earmarked reserves, which stood at EUR1.5bn at end-2015. Debt and Liquidity (Strength) Calabria's debt remains close to EUR1.5bn or one-third of current revenue, with a majority of it at fixed rates. Liquidity remains fairly strong, at nearly 5x-7x annual interest and principal repayments, although current cash reserves of about EUR1bn will decline as pre-2010 arrears (EUR0.4bn) of the healthcare sector are paid and the region increases capital spending. Management (Neutral) Fitch calculates Calabria's free reserves at nearly EUR200m or 3% of operating revenue, when the fund balance is netted of cash advances from the national government and investment commitments for so called "residui perenti". New accounting rules requiring regions to balance recurrent spending with recurrent revenues are helping to streamline budget planning. Calabria's administration is forecasting a 5% operating margin per year in 2016-2018, but this figure declines towards Fitch's 2%-3% projections when also adjusted for about EUR100m of uncollected tax for waste recycling - a responsibility the region took over from its cities for the 2015-2017 period. Inadequate administrative capacity in the region's certain healthcare units is causing delays to clearing commercial liabilities (EUR0.4bn) that have been outstanding for a number of years. This in turn contributes to low business confidence despite commercial bills in the healthcare sector in the current fiscal year being mostly paid within 60 days. Economy (Neutral) Fitch expects the Calabrian economy to extend into 2017 the mild recovery of 0.5%-1% started in 2016. This will be underpinned by growth in EU-subsidised agriculture and increasing tourist flows, which could add up to 3pp to Calabria's low 40% employment rate. The economy remains enfeebled by years of recession over 2008-2014, which caused a 10% fall in employment and stagnant consumption. Fitch expects the unemployment rate to remain above 20% over the medium term despite a resumption of public works, such as in the transport sector, lower corporate debt and rising profit margins as about one-third of local SMEs see turnover growth. The small scale of registered businesses allows fixed-cost flexibility especially during down-cycles, though at the cost of insufficient capital for investments pivotal to long-term growth. The expected economic recovery in the region will have a modest impact on healthcare revenue as resources for this sector, which account for nearly 80% of Calabria's budget, are largely funded by the national government. Institutional Framework (Neutral) Fitch assesses Italian inter-governmental relations as "Neutral" to the ratings. Sub-nationals with a weak economic base, such as Calabria, receive subsidies to raise service provisions to national standards. However, this predictability offered by revenue equalisation is offset by weak enforcement of prudential regulation to preserve fiscal balance, which at times leads to off-balance sheet liabilities. Amortising debt structures and repayment of financial debt in priority over commercial liabilities as required by national legislation underpin timely debt servicing even during liquidity stress. RATING SENSITIVITIES Relaxation of spending amid rigid revenues leading to debt servicing requirements not being covered could result in a downgrade. Stronger economic recovery leading to sustained recovery of the employment base underpinning tax-raising flexibility, coupled with an improvement in the region's operating margin towards 5% could benefit the region's intrinsic credit profile as the IDR may be constrained by the sovereign rating Contact: Primary Analyst Raffaele Carnevale Senior Director +39 02 879087 203 Fitch Italia S.p.A. Via Morigi 6 - Ingresso Via Privata Maria Teresa, 8 20123 Milan Secondary Analyst Gian Luca Poggi Director +39 02 879087 289 Committee Chairperson Guilhem Costes Senior Director +34 93 323 8410 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available at 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=1016662 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. 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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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