Fitch Affirms Historical Territory of Alava at 'A'; Outlook Stable
The affirmation reflects Alava's strong socio-economic profile, sound fiscal performance, and solid debt coverage. The Stable Outlook reflects that on Spain (BBB+/F2/Stable), as the province is presently rated at the maximum level above the sovereign.
KEY RATING DRIVERS
Alava can be rated higher than the Spanish sovereign because of its financial and fiscal autonomy recognised by the Spanish constitution, which mitigates sovereign unilateral interferences with the province's revenue. The ratings reflect Alava's special status, solid socio-economic profile, proven ability to maintain stable and sound operating performance, and a solid debt coverage ratio. The ratings also take into account the province's prudent management and high level of financial transparency.
In common with the other two Basque provinces, Alava has a special legal and fiscal status, which is explicitly recognised by the Spanish Constitution. Under this regime, the provinces benefit from a special tax arrangement, whereby they have wide fiscal powers, are entitled to levy and collect taxes in the province and have the authority to set rates on a number of taxes, primarily personal income tax. This gives the provinces strong fiscal flexibility and is a positive rating factor. Some of the fiscal receipts have to be transferred to other tiers of government as per an established agreement.
Alava is a wealthy province by national and international standards, with a GDP per capita estimated in 2013 at 50% above the Spanish average. Its economy is strong and diversified, with a solid and significant manufacturing sector (30% of GDP in 2013 for Alava versus 12% in 2013 for Spain) and a smaller contribution from the construction sector than at the national level.
Alava's solid fundamentals are also demonstrated by a high employment rate, at 52.2% in 4Q15 versus 47% for Spain. Jobs creations increased 4.4% between 4Q13 and 2Q16, after significant accumulated job losses over the past six years. However, the province has a higher share of elderly population than Spain, which translates into higher pressure on social public services.
Sound and Stable Fiscal Performance
The province has reported strong fiscal performance, posting a positive current balance over the last five years and an operating margin averaging 7% in 2011-2014. At end-2015, Alava posted a better-than-expected result with an operating margin of 6.4% (6.5% in 2014), due to higher personal income and corporate taxes.
Alava's new government approved its first budget for 2016 and Fitch's base case scenario projects that the operating margin will remain solid for 2016-2017 in the range of 6%-7%, based on tax revenue growth as economic activity continues to improve. Operating spending is likely to grow 3%-4% over 2016-2017, largely on social programmes, following several spending cuts in 2008-2014 (11%).
The May 2015 elections saw a coalition being formed between the regional right wing party Partido Nacionalista Vasco (PNV), with the support of the socialist wing party PSE-EE. The new Deputy is Ramiro Gonzalez Vicente, and we expect a strong intention to comply with fiscal targets and intensification of fight against fraud.
A minimum condition for Alava's IDRs to be upgraded is an upgrade of the sovereign, as the province is presently at the maximum level above the sovereign rating, together with an improvement of the operating margin to 10%.
A downgrade may result from a substantial increase in direct debt, which would contribute to a substantial deterioration of direct debt servicing-to-current revenue ratio (2015: 2.2%), or from a downgrade of the sovereign.