OREANDA-NEWS. September 28, 2015. Fitch Ratings has revised the Italian City of Rome's Outlook to Stable from Negative and affirmed its Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB' and Short-term foreign currency IDR at 'F2'.

The revision of the Outlook factors in Fitch's expectations that Rome will continue to be supported by the national government in strengthening its operating performance, and will post a positive margin of around 2%-3% over the medium term, thereby covering annual debt servicing requirement for interest and principal. The ratings mainly reflect Rome's low direct debt, which we forecast to remain at one-third of the budget.

KEY RATING DRIVERS
The rating action reflects the following rating drivers and their relative weights:

HIGH:
Institutional framework: The city continues to benefit from ad-hoc financial support measures, including from Gestione Commissariale del Comune di Roma (BBB+/Stable), which took on Rome's EUR6bn of liabilities pre-dating 2008, and the implementation of a recovery plan to overcome the nearly EUR200m operating deficit in 2013, or 5% of the city's budget.

While the national government contributes to financing Rome's unexpected events or large projects, the city is exposed to the national policy of trimming its deficit and debt. Rome remains a net payer to municipalities' equalisation fund, with about EUR350m contribution in 2014. Therefore overall Fitch considers inter-governmental relations as neutral for Rome.

MEDIUM:
Fiscal performance: Fitch believes that Rome will achieve a balanced operating budget in 2015, an improvement from a small deficit in 2014, driven by a 2% growth in operating revenue towards EUR4.8bn, after adjusting for a difficult-to-collect EUR200m. Rome's 2014-2016 recovery plan implies an expansion of the property and waste collection tax bases and rising rents combined with cost control, such as curtailing purchases of goods and services and partial replacement of retirees.

The city is committed to streamlining the cost structure of its tax-supported subsidiaries, chiefly the waste collection company AMA and the transportation company ATAC. Fitch expects increased subsidies from Rome and the Region of Lazio to play a key role in eventually overcoming ATAC long-lasting losses, due largely to both rigid labour costs and low fare revenue. A reform of waste collection, which could see a possible role for private operators, is aimed at shrinking the burden on Rome's budget as AMA currently receives annual waste tax for performing the service regardless of the actual collection of tax proceeds.

Investments of about EUR1bn in 2015-2016, or 10% of total spending, including projects for the upcoming Jubilee, primarily transportation and road maintenance, as well as the environment, will largely be funded by capital transfers and asset sales, limiting deficit spending.

Management: Fitch expects Rome to tackle budgetary pressures stemming from the fund balance deficit of EUR850m by resorting, if need be, to preferential payments of financial debt, pending more conventional measures to overcome the shortfall. The latter emerged over the summer 2015 following an extraordinary revision of outstanding receivable and payable leading to increased provisions of EUR1.7bn, against previous calculation of doubtful receivables of about EUR1bn. This came ahead of the implementation of a new accounting system from 2015, which would lead to more accurate forecasts. Fitch will continue to strictly monitor Rome's liquidity as one of the administration's priorities remains improving tax and fee collection from 80% in 2013.

LOW
Debt: Fitch expects Rome's direct debt will increase over the medium term up to EUR1.5bn, around one-third of the budget, from EUR1.2bn at end-2014, to partly finance capital spending, as opposed to stable debt forecast in the city's budget. However, Rome's debt would double when the fund balance deficit and the financial debt of tax-supported municipal companies are included.

Fitch believes that direct debt service will be fully covered by the operating balance in 2016-2017 with principal and interest payment accounting for about 2% of revenue and a debt-to current balance around 25 years.

Economy: Fitch forecasts the city's GDP will grow 0.5% in 2015 and 1% in 2016, mainly driven by Jubilee-related events, such as growth of the tertiary sector, tourism (accommodation, restoration) and commercial activities, strengthening tourist tax revenue and conducive to maintaining solid economic indicators over the medium term. Fitch projects the unemployment rate will slightly decrease in 2015-2016, to 10% in 2015-2016 (11% in 2014), underpinning the growing tax base.

RATING SENSITIVITIES
The ratings could be downgraded if average tax and fee collection rates fail to improve from 80%, undermining confidence in the financial management of the city's accounts.

Conversely, a solid and persistent growing economy, supporting a stronger fiscal performance including the overcoming of the fund balance deficit and operating margin rising towards 10%, could result in a positive rating action.

KEY ASSUMPTIONS
The national government will support the extra costs that Rome will incur in 2015-2016 for the Jubilee with additional contribution from the Gestione Commissariale del Comune di Roma.