OREANDA-NEWS. Fitch Ratings has affirmed the Autonomous Community of La Rioja's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB' with Stable Outlooks. Fitch has also affirmed the Short-term foreign currency IDR at 'F2'. The ratings on the senior unsecured outstanding bond issues have been affirmed at 'BBB'.

The affirmation reflects the improvement in La Rioja's fiscal performance in 2015, from the rather weak fiscal result in 2014, as well as a moderately high debt burden and expected financial support from the central government. The affirmation also reflects that the economy fares better than the national average. The Stable Outlook incorporates Fitch's expectations that the fiscal performance will improve gradually and direct debt will rise until 2017 to around the 150%-160% range of its expected current revenues from 136.8% in 2014.

Expected Improvement in Operating Performance
Following the regional elections in May, the new government is poised to approve its first budget in 2016. Overall Fitch currently considers that La Rioja's operating performance should gradually improve, with an operating margin of 4%-7% over 2015-2017 (1.5% at end-2014). This essentially stems from revenue growth from the improving national economy. Fitch considers that operating expenditure, which has been declining since 2009, could grow by 2.5%-3.0%% over 2015-2017, after the autonomous community lifted cost-containment policies.

No Majority in the Government
At the regional elections on 24 May 2015, a coalition was formed between the former centre-right wing party Partido Popular (PP) and the centre wing party Ciudadanos after the PP was in power in absolute majority in the last five mandates. The new President, Mr. Ceniceros was the former president of the regional parliament, and we could expect some continuity with a strong intention to comply with fiscal targets.

The 2016 draft budget presented in November relies on 6% yoy growth in operating revenues largely stemming from higher resources from the central government and 4% yoy growth in operating spending largely on social programmes.

General elections are scheduled for December 2015, and debates on a new funding system for Spanish regional governments should start afterwards. This will be an important factor for La Rioja's IDR. Nevertheless, Fitch considers that it is still too early to assess its impact.

Moderately High Direct Debt
In 2015, La Rioja will receive EUR274m from the Financial Facility Fund (FFF), expected to cover its borrowing needs for the year. It is expected to receive EUR195m from the Regional Liquidity Fund (FLA) in 2016, covering its borrowing needs. This would result in expected direct debt of around EUR1.4bn-EUR1.5bn between 2015 and 2016 or 145%-155% of its expected current revenue from EUR1.2bn at end-2014 (136.8% of current revenues). Nevertheless, it indicates a reduction of the debt servicing to current revenue ratio to 25%-30% for 2016-2017 (35.3% in 2014). Pressure on debt servicing is still high, in particular with a debt calendar at end-2014 showing debt repayment for the next three years of EUR692.9m, representing about 41% of outstanding direct debt at end of 2014.

State Financial Support
At end-2015, state mechanisms will represent around 19% of expected direct debt. This is as the central government intensified its financial support on 23 December 2014, introducing the new instrument FFF for regional governments compliant with the stability goals and the FLA, benefiting from zero interest rates in 2015. Nevertheless, Fitch believes that La Rioja could borrow in capital and commercial markets to finance its deficit needs.

Regional Economy Recovering
With an estimated nominal GDP of EUR7.8bn, La Rioja's economy is better than the national average demonstrated by a GDP per capita 9.7% above the national average and an employment rate of 49.3% in 2014, compared with the national average of 45%. La Rioja's economy is recovering as nominal annual GDP grew by 1.5% in 2014, more than national GDP growth (0.89%) and in October 2015 job creation intensified by 3.2% since December 2014 (3.3% in Spain). However, at 13.6% in 3Q15 the unemployment rate is still significantly higher than the EU average and below the Spanish average of 21.3%, limiting taxpayers' contributions to the autonomous community's revenue growth.

La Rioja is a small region located in northern Spain, with a service-oriented economy but it also benefits from a strong manufacturing sector made up of small and medium enterprises. It is also well known for its wine production.

The ratings could be upgraded on the back of an economic improvement with an operating margin consistently exceeding 5% and a reduction of the direct debt to current revenue ratio from its current level (2014: 136.8%).

A negative current balance for two consecutive years, possibly driven by a higher than expected operating expenditure growth, combined with direct debt exceeding 150% of current revenues could drive negative rating action.