OREANDA-NEWS. Fitch Ratings says in a new report that it expects the Spanish autonomous communities to extend their trend of negative operating performance in 2016, albeit at a slower pace than in 2015. This follows preliminary 2015 results showing a worsened performance, as the regional governments reported a negative current balance for the sixth consecutive year.

Although Fitch does not rule out the possibility that few autonomous communities may achieve positive current balances in 2016, this may not be enough to result in positive rating actions.

Preliminary 2015 results showed a wider current deficit of EUR11.3bn, compared with a deficit of EUR10.6bn in 2014, and contrary to our expectations of an improvement given increased funding granted by the central government. However, the performance was not homogeneous across the sector, with 12 out of 17 autonomous communities reporting an improved current balance, including four autonomous communities with a positive current balance. As many as 13 autonomous communities had a negative current margin, although for six of them the margin was only between -1% and -5%.

The sector of autonomous communities did not comply with the fiscal deficit target of 0.7% of GDP, but more importantly, the negative performance in the current balance extended for the sixth consecutive year. The weak result in 2015 was due to higher current expenditure (up 4% yoy), as payables in arrears were paid off with new borrowings, and as temporary cost-containment policies introduced over 2011-2013 wound down. There was particularly a strong concentration of current spending in December 2015, in contrast to past years when it was more related to capital expenditure.

Current revenue grew a solid 3.7% yoy, supported by a 3.2% yoy rise in employment in 4Q15 and a revenue settlement from 2013 of EUR1.7bn.

Capital expenditure was EUR15.5bn in 2015, down 25% from 2011, in what Fitch believes to be an effort to comply with stricter deficit targets.

The current funding system will likely be reviewed after the general elections scheduled in June 2016. The reform may be encompassed in a wider re-set of the public sector in Spain, including changes to the responsibilities of regional governments under an amendment of the Spanish Constitution. Fitch will monitor developments and will assess their potential impact on the regional governments' credit profiles.