OREANDA-NEWS. Fitch Ratings has affirmed the Polish Region of Malopolska's Long-Term Foreign Currency Issuer Default Rating (IDR) at 'A-', Long-Term Local Currency IDR at 'A' and National Long-Term Rating at 'AA+(pol)'. The Outlooks are Stable.

The affirmation is based on Fitch's unchanged baseline scenario regarding the region's sound operating performance and moderate debt levels in the medium term with healthy debt service ratios.

KEY RATING DRIVERS

The IDRs reflect the region's solid strategic and financial management, sound operating performance, strong self-financing capacity of investments and high flexibility on expenditure.

Fitch forecasts Malopolska's operating results will remain solid in 2016-2019, with an average operating balance of about PLN120m, or 13%-14% of operating revenue, which is broadly in line with last five years' results. This will be supported by growth in income tax revenue, due to the projected growth of the national economy. The region's operating performance will also be driven by the administration's intention to keep operating expenditure growth under control and to finance new investments with the region's own resources.

In 2015 Malopolska posted a high operating balance of PLN126m, which accounted for 15.6% of operating revenue or a still high 13.8% when excluding PLN17m of one-off revenue items, such as the VAT refund relating to the purchase of rolling stocks. This strong operating balance, together with higher-than-originally planned EU grants, allowed the region to post a budget surplus of PLN29.3m (2.6% of total revenue). This allowed the region to repay its debt, which fell to PLN413m or 51% of current revenue in 2015, from PLN436m in 2014.

Fitch projects that Malopolska's investment spending in 2016-2019 could total PLN2.9bn (on average PLN700m annually or 45% of annual total expenditure), as the region has started to roll out investments under the 2014-2020 EU budget. Fitch assumes that the region will continue to receive significant EU funds to co-finance its investments. Consequently, Malopolska's share of investment financing will be covered by capital revenue (70%), the current balance (20%) and new debt (10%).

Fitch expects Malopolska's direct debt to remain moderate in 2016-2019, at below 65% of current revenue, although it will grow by about PLN50m annually and reach PLN600m in 2019. Fitch expects the region's debt service ratios to remain strong. Debt service, projected to average PLN60m annually (principal and interests), is likely to be covered about 2x by the operating balance. The debt-to-current balance ratio, although expected to weaken to around six years (3.3 years in 2015), should remain below the region's final debt maturity (up to 15 years).

Similar to other Polish regions, Malopolska is characterised by high flexibility on its operating spending, as reflected in the moderate proportion of fixed operating costs in the regional budget (staff costs averaged 29% of total opex in 2013-2015). This balances the region's limited revenue-raising flexibility, as income tax rates are decided by the State (revenue from this source averaged 47% of operating revenue in 2013-2015).

The region's economy is well diversified and services-orientated, with 66.7% of gross value added represented by the service sector (above the national average of 63.4%). Malopolska contributed 7.7% to national GDP in 2013, making it the fifth-largest contributor among the 16 Polish regions. However, due to its high population (3.36 million), its GDP per capita was about 11.3% below national average. The region's unemployment rate of 8.4% at end-2015 was also below the national average (9.8%).

Malopolska operates under a predictable regulatory regime. The region is transparent in its operations, supported by the publication of long-term financial projections and regular disclosure of annual accounts.

RATING SENSITIVITIES

An upgrade of the sovereign ratings, accompanied by the region's solid operating performance, declining pressure on debt-funded capex and low indirect risk, could trigger an upgrade of Malopolska's ratings.

The ratings could be downgraded if Malopolska's operating performance consistently weakens and direct and indirect debt grows above 80% of current revenue on a sustained basis.