OREANDA-NEWS. Although decreasing--unemployment at 10.2% in 2015, compared with 6.4% for Germany and 9.2% on average for all eastern German states. The overall trend in unemployment rates for Saxony-Anhalt is favorable, with unemployment having decreased from 18.3% in 2006. In our view, this improvement reflects the state's relative resilience to the economic recession of 2009 and the quick recovery of its labor market.

Saxony-Anhalt's track record of surpluses after capital accounts supports our view that its debt reduction is achievable. Saxony-Anhalt's debt is very high in an international comparison, but moderate for a German state. In addition to very high tax-supported debt, the state has high unfunded pension liabilities, which we estimate at more than 100% of operating revenues. We view positively that the state has established a pension fund that is supposedto cover all pension liabilities for employees hired after 2006. In our base-case scenario, we project the state's tax-supported debt to reduce somewhat to about 194% of consolidated operating revenues by 2018 from about 204% in 2015, but to remain above 180% over the next few years, given the state's structural challenges described above.

Our view of Saxony-Anhalt's low contingent liabilities reflects the state's minority 5.6% stake in Norddeutsche Landesbank Girozentrale, and that its outstanding guarantees consist mainly of grants for special-purpose banks and their onlending activities. Yearly losses from these guarantee programs are low and carry only minor financial risks for the state, in our view. We estimate that the state's losses in a stress situation would be 2%-10% of its operating revenues.

LIQUIDITY

We assess Saxony-Anhalt's liquidity as strong in an international comparison, taking into account its exceptional access to external liquidity. The state intentionally uses its commercial paper program, which we rate 'A-1+', for funding needs during the year. We take into account Saxony-Anhalt's free cash and liquid assets, as well as two contractually agreed credit lines totaling €212 million, which we regard as committed and undrawn. The state's average volume of liquidity, as defined in our criteria, equates to slightly more than60% of the next 12 months of debt service, including our estimate of the usageof the commercial paper program. We therefore believe that the state will continue to depend on its access to functioning capital markets to refinance its debt.

Saxony-Anhalt benefits from exceptional access to capital markets, its access to a voluntary platform of short-term funding from the German federal treasuryand other states, and its intraday access to funds from the Bundesbank. The state regularly taps international capital markets, also in foreign currencies.

OUTLOOK

The stable outlook reflects our expectation that Saxony-Anhalt will not deviate from its goal to reduce its very high nominal debt burden over the forecast horizon. We also believe that the current negotiations between the states and the federal government for a new tax equalization system will preserve the supportive institutional framework for German states.

We could lower the ratings if Saxony-Anhalt were structurally unable to achieve surpluses after capital accounts, which are needed to reduce its very high direct debt. In this scenario, we would also revise our assessment of thestate's financial management. We could raise the ratings if the state manages to close the gap between the German average and the state's key economic figures like population growth, unemployment, and value added.

However, we currently view the downside and upside scenarios as unlikely over the next two years.