Fitch Affirms Autonomous Community of the Canary Islands at 'BBB-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the Autonomous Community of the Canary Islands' Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-' with Stable Outlooks and Short-term foreign currency IDR at 'F3'. The 'BBB-' ratings on Canary Islands' outstanding senior unsecured bond issues have also been affirmed.
The affirmation reflects no changes since the last review to the rating floor applying to Spanish autonomous communities.
KEY RATING DRIVERS
The ratings are supported by the 'BBB-' rating floor for Spanish autonomous communities. The rating floor is based on a number of supporting factors that contribute to a region's improving liquidity and reducing the likelihood of default. These include the budgetary stability law and the recent law controlling commercial debt; the absolute priority of debt servicing by law as per article 135 of the Spanish Constitution; and the access to state support mechanisms such as the Regional Liquidity Fund (FLA) and the Financial Facility Fund (FFF).
Central Government Support
In Fitch's view, access to the state support mechanisms will continue to ensure timely debt servicing for Canary Islands. At end-2014, the region had received a total of EUR2.6bn from state support funds - representing 43% of direct debt, an illustration of strong support from the central government. On 26 December 2014, the Ministry of Finance and Public Administration introduced the Royal Decree Law 17/2014 to enhance the financial state support to the Spanish regions in place since 2012, by introducing a new instrument - the FFF - for regions compliant with the stability goals, and another one to fund the regional governments' provision of social services.
Canary Islands is eligible for FFF funds as it met the fiscal deficit goal in 2013, and will receive a total of EUR958m in 2015 from the FFF, carrying zero interest over 2015-2017, to cover its borrowing needs for the year. The region started a funding strategy in 2014, including refinancing several outstanding loans at lower interest rates, such as the EUR224m loan from the Suppliers Fund, realising a saving of EUR40m, and a EUR50m private placement to an international institutional investor given lower rates compared with the domestic market. The region is keen to continue gaining autonomy in its funding strategy, which is credit positive, in Fitch's view.
Direct debt was EUR6bn at end-2014, a rise of over EUR2.7bn since end-2010. Fitch's base case scenario forecasts a decelerating increase in debt over the next two years, with debt totalling EUR6.8bn by end-2016, close to 125% of the projected current revenue.
2014 Fiscal Compliance
Canary Islands posted a 0.91% deficit in 2014, the only region under the common regime to have met the 1% deficit goal for the year. The good economic sentiment allowed a 17.2% higher than budgeted performance of the indirect taxes directly collected by the region, notably the General Indirect Canarian Tax (IGIC), which operates in the region in lieu of the VAT as per the outermost status of Canary Islands within the EU. As of August, the execution of the 2015 budget was adequate and showed a deficit of 0.28% fiscal deficit over the regional GDP, so the 0.7% year-end goal seems reachable. In Fitch's view, if the positive economic trend and cost restraint continue, Canary Islands' operating performance may break even over 2015-2016. The region's strong commitment to comply with fiscal targets and its reliable forecasts are credit positive.
A new financial system for the Spanish regions is under debate. Although it is too early to determine its impact on Canary Islands, Fitch considers the region only faces positive scenarios as it is currently underfunded compared with the rest of Spanish regions under the common regime.
Regional Economy Recovering
The Canary Islands have a weaker economic profile than Spain with a GDP per capita equivalent to 86% of the national average, albeit average by international standards. We expect GDP growth will exceed 2% for 2015-2016, outperforming the national economy. The main driver is the tourism sector, which accounts for roughly 30% of GDP. However, the regional economy is burdened by structural high unemployment (32.4% at year-end 2014, above 24.4% for Spain).
As Canary Islands' IDR's are supported by the 'BBB-' rating floor for Spanish autonomous communities, they would likely be downgraded if the floor is removed.
A structural improvement of the budgetary performance associated with a debt to current revenue ratio below 130% could bring the region's intrinsic credit profile closer to the floor.