OREANDA-NEWS. Fitch Ratings has affirmed the Spanish Autonomous Community of Asturias's (Asturias) Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BBB' with Stable Outlooks. Fitch has also affirmed the Short-Term Foreign Currency IDR at 'F2'.

The affirmation reflects Asturias's weak fiscal performance, a moderately high direct debt burden and financial support from the central government. The Stable Outlook incorporates Fitch's expectations that the region's fiscal performance will gradually improve, limiting direct debt growth to 107%-110% of current revenue through to 2017, versus 106% in 2015.

KEY RATING DRIVERS

Weak but Improving Operating Performance

Fitch expects Asturias's operating margin to improve to 1%-3% in 2016-2018, from 1% in 2015, when adjusted for EUR25m one-time spending items. The expected improvements are based on projected operating revenue growth of 3.2%, driven by a growing national economy. Operating expenditure is likely to grow 2.3% on average in 2016-2018, after the autonomous community lifted cost-containment policies introduced in 2010-2014.

Rising Direct Debt

Asturias received EUR560.8m in 2015 from the Fondo de Facilidad Financiera (FFF), a state support fund, to cover its deficit, debt maturities (EUR293m), and importantly, deficits from previous years. Direct debt edged towards 106% in 2015 (102% in 2014), which Fitch expects to further rise to up to 108% in 2016. We forecast debt servicing obligations will absorb 14%-16% of expected current revenues (12% in 2015).

Pressure on debt servicing is high, with overall debt repayments for the next three years totaling EUR1.1bn, or 36.4% of outstanding direct debt at end-2015. However, default risk on market debt is mitigated by 47% of the direct debt being contracted through the state support mechanism, at subsidised rates. Nevertheless, in 2016 Asturias is turning to debt capital markets to finance its budgetary needs and debt redemptions.

State Financial Support

As at end-2015, 47% of the outstanding direct debt came from state support mechanisms, Asturias benefits from subsidised rates of interests.

Regional Economy Recovering

Asturias's economy grew 3.9% in 2015 to an estimated nominal GDP of EUR21.6bn. Job creations increased 2.9% between June 2016 and December 2013, after 43% jobs were lost between 2008 and 2013. Asturias's employment rate is lower than the national average due in part to its ageing population. The region has a higher share of elderly population than Spain (24% versus 18.4%), which translates into more pressure on social public services.

RATING SENSITIVITIES

Direct debt exceeding 150% of current revenue (2015:106%), combined with a negative operating balance, could trigger a negative rating action.

The ratings could be upgraded if the regional government reports a positive current balance and reduces direct debt to 100% of current revenue.

KEY ASSUMPTIONS

Fitch assumes national economic growth will translate into enhanced funding resources from the central government to regional governments from 2017.