OREANDA-NEWS. Fitch Ratings has affirmed the Region of Veneto's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB+' with Stable Outlooks and Short-term foreign currency IDR at 'F2'.

The affirmation factors in the region's stable budgetary performance, tight control over spending, and moderate debt burden. The ratings also reflect Veneto's sound liquidity position and the wealthy socio-economic profile underpinning regional tax base.

KEY RATING DRIVERS
Stable Operating Performance
According to preliminary figures, the region posted a 3% operating margin in 2015, when adjusted by Fitch for about EUR300m of extraordinary revenue. Fitch expects Veneto's operating surplus to continue hovering around 2% of revenue, or EUR250m, over 2016-2017, as ongoing results of tight operating spending control and a solid grip on the healthcare sector (with costs representing around 90% of total spending and 80% of the budget) offset sluggish revenue dynamics.

The 2016 national budget law has partly limited regions' tax raising flexibility (which for Veneto accounts for about 9% of revenue). Focussed capital spending, expected to be mostly sized for capital transfers, will be key to maintaining balanced budget over the medium term, as required by law.

Low Debt, Sound Liquidity
Veneto's financial debt totalled EUR2.66bn at end-2015 with no new borrowing (EUR2.77bn at end-2014), or 25.5% of operating revenue, when adjusted for about EUR1.6bn of state-subsidised borrowing in 2013-2014. In Fitch's central scenario, debt will rise to EUR3.5bn in the medium term, with a debt-to-current balance around 20 years. Debt service accounts for a modest 2% of current revenue. We assume debt service will be fully covered by the current balance over the medium term

Veneto's liquidity position, which provides a cushion against possible temporary inflow/outflow mismatches, remained sound at about EUR1.4m at end-2015 (or 55% of outstanding direct risk, which includes state-supported loans and subsidised loans), averaging EUR1bn over the past years.

Conservative Policies
Veneto's management has proved conservative, maintaining a balanced healthcare sector and sustainable debt indicators. At the beginning of 2015, the region re-calculated its fund balance according to new accounting rules for Italian LRGs, posting a fund balance deficit of EUR2bn (EUR2.2m in 2014) after an extraordinary recognition of payables and receivables. Fitch considers that the fund balance deficit will be partly funded over the medium term by the high liquidity accumulated and eventually new borrowing.

Positive Economic Trend
The region maintains solid economic indicators, with GDP per capita at 110% EU-28 average, unemployment rate at 7.1% at end-2015 (Italy: 12%) and a stable employment rate around 63% (Italy: 56.6%).

Fitch expects Veneto's GDP has grown by about 1% in 2015, mostly driven by industrial sectors, tourism and exports. The region remains one of the largest Italian exporters (commerce, machinery, leather, glasses and medical devices) and a solid manufacturing area. Fitch believes this will sustain 2016 GDP growth on a positive trend.

Neutral Institutional Framework
Fitch considers intergovernmental relations as neutral for Veneto's ratings. Benefits from national state support, such as transfers and subsidised loans, are offset by the region's contribution to Italy's consolidation efforts to balance the national accounts, through revenue curtailments.

RATING SENSITIVITIES
Veneto's IDR remains constrained by Italy's rating as per Fitch's criteria. An upgrade would be contingent on an upgrade of Italy's sovereign rating provided that the region continues to perform in line with Fitch's projections.

Conversely, Veneto's IDR could be downgraded if its fundamentals were to weaken with the current margin turning negative on a permanent basis amid a widening fund balance deficit.