Fitch Affirms City of Pamplona at 'BBB+'; Outlook Stable
The affirmation reflects Pamplona's sound operating performance and liquidity in 2015, and moderate direct debt. The affirmation also reflects the city's strong economy. The Stable Outlook factors in our expectations of steady operating performance and a moderate reduction of direct debt through to 2018.
KEY RATING DRIVERS
Pamplona is the capital of the Autonomous Community of Navarre and the city represents a high 30.5% of the region's population. Pamplona's economy is wealthy as the city functions as an important administrative, political and economic centre in Navarre. Pamplona is also an important service centre in the region through its location for high-quality private health clinics and university centres, contributing to the dynamism of the local economy.
Its strong economy is demonstrated by a regional GDP per capita in 2015 that was 23.2% above the Spanish average and a higher-than-average regional employment rate at 50.7% in 2015 (46.4% in Spain). After a period of large losses during 2008-2013, the labour market is recovering with job creation in the region expanding 6.4% between August 2016 and December 2013. In December 2015, local housing prices were 1.2% above Spain's, demonstrating the city's wealthier economy.
Sound and Steady Budgetary Performance
Pamplona's steady and sound operating revenue is largely driven by significant and predictable current transfers from Navarre (42% of operating revenue in 2015), due to the city's special status as the capital of Navarre.
Fitch expects Pamplona's operating margin will remain sound at 12%-13% on average for 2016-2018 (12.8% at end-2015). We expect operating expenditure will grow between 1% and 2% on average in 2016-2018, largely on social spending. For 2016, current transfers from the government of Navarre will grow 3%, above expected inflation. For 2017, Fitch expects this will grow 2%, in line with expected inflation.
Local elections in May 2015 saw the formation of a coalition government with a majority by the left wing parties Euskal Herria-Bildu and Aranzadi, Izquierda-Ezquerra and the centrist left wing party Geroa Bai. This has resulted in a more fragmented city council political composition, compared with the last single-party government by the Union del Pueblo Navarro. The new mayor Joseba Asiron continues to have a strong intention to comply with fiscal targets.
Moderate Direct Debt
Direct debt in 2015 remained moderate, at close to 49.9% of current revenue or EUR93.9m, down from 55.3% or EUR102.1m in 2014. In 2016, Fitch expects direct debt will reduce to close to 42%-45% of expected current revenue, or EUR83m-EUR86m.
Pressure on debt servicing is moderate, particularly with total EUR25.3m debt maturing over the next three years, or 27% of outstanding direct debt at end-2015. Pamplona's liquidity is stable and high, representing 31% of the city's outstanding direct debt at end-2015, meaning that no renewal of short-term credit lines has been necessary.
Pamplona's IDRs are constrained by the sovereign IDRs (BBB+/Stable) and are sensitive to changes of the sovereign ratings. An upgrade of the sovereign IDRs would result in an upgrade of Pamplona's IDRs, provided the city continues to report sound operating performance and a moderate direct debt-to-current revenue ratio.
Although currently viewed by Fitch as unlikely, Pamplona's IDR could be downgraded if debt repayment increases significantly above 55% of the city's current balance expected for 2016 and 2017 (2015: 36%), combined with the operating margin falling sharply below 5% (2015: 12.8%).