Fitch Affirms Autonomous Region of Friuli Venezia Giulia at 'A'; Outlook Stable
The affirmation reflects FVG's demonstrated ability to maintain solid operating performance coupled with low debt level. The Stable Outlook reflects Fitch's expectation that the region will maintain a solid and resilient operating surplus at 10% of revenue in 2015-2017 enhanced by statutory provisions, amid decreasing financial debt, which is set to fall to about 5% of operating revenues by 2017. The Short-term 'F1' rating is based on the ample liquidity the region has accumulated.
KEY RATING DRIVERS
Institutional Framework (Neutral)
FVG is eligible to be rated above the sovereign by virtue of its institutional strength and high degree of financial autonomy. FVG's special autonomous status entitles it to receive fixed shares of major national taxes collected in its own territory, ranging from 91% of VAT to 45% of corporate income tax, underpinning the region's tax revenue resilience and limiting dependence on state transfers. A diversified set of responsibilities supports its budgetary flexibility.
FVG's contribution to national consolidation efforts is subject to bilateral agreements and will account for EUR750m-EUR800m over 2014-2018, or 12%-13% of region's budget, decreasing from EUR1bn in 2013. However, FVG's rating differential above the 'BBB+' sovereign rating reflects the risk of weakening predictability of intergovernmental relations and captures possible interference by the state in case of macroeconomic stress and/or stressed sovereign finances. Subsequently, Fitch considers Italian inter-governmental relations as "Neutral" for FVG.
Fiscal Performance (Strength)
The operating margin was resilient during the recent recession averaging above 10% over 2009-2014. Fitch expects a comparable performance in the 2015-2017 under the assumption of continuous costs controls on the healthcare sector, which absorbs 50% of revenues, Transfers to local authorities and public transport are expected to stabilise at close to EUR700m, or 13% of operating spending, helping restrain cost growth.
Debt, Liabilities and Liquidity (Strength)
Direct debt has almost halved from EUR1.3bn at FY10 and Fitch expects further debt reductions towards EUR500m by end FY15. Conversely, guarantees issued to the network regional companies are rising to support regional investment in an effort to stimulate the local economy. Fitch estimates direct and indirect risk will hover around EUR1.2bn in 2017, or 20% of operating revenue, which is still low compared with international peers. Relaxation of spending rules to fund capital spending within the agreement with the national government may reduce liquidity towards EUR1bn by 2017 from average EUR2bn in 2011-2014.
Management & Administration (Neutral)
Fitch expects FVG to strengthen investment spending to up to EUR1bn by 2017 from about EUR600m in 2013, helping revive the regional economy while maintaining a budget close to balance. Fitch considers FVG's budgeting reliable and prudent, with budget figures regularly in line with actual. Undrawn loans for about 10% of the budget underpin FVG's fund balance surplus and cushion against any unforeseen spending needs.
With a population of 1.2 million and EUR35bn GDP, FVG's economic robustness is mirrored in a GDP per head around 10% above the national average and unemployment below the national level (8.0% in 2014 versus Italy's 12.7%). Fitch foresees continued improvement in the economy after years of slower economic gains following the last recession. Growing exports, improved domestic demand coupled with revived public and private spending, will drive rising GDP, which Fitch has revised upward to 0.8% in 2015 from 0.5% and 1.3% in 2016. Strong internationalisation and the pivotal role played by the insurance and shipbuilding sectors leave the regional economy susceptible to exogenous economic shocks.
FVG's IDR is two notches above sovereign, highlighting its strong intrinsic credit profile. An improvement of the latter with an operating margin increasing towards 20% amid low debt and easing risks of national macro-economic could lead to an upgrade. The rating could come under downward pressure upon a downgrade of Italy's sovereign rating or a weaker intrinsic credit profile, such as a sustained departure from Fitch's expectation of 10% operating margin in the medium term combined with direct and indirect debt in excess of 50% of total revenues.