Fitch Affirms Autonomous Community of Asturias at 'BBB'; Outlook Stable
The affirmation reflects Asturias' still weak fiscal performance and a moderately high direct debt burden. Despite expectations that its fiscal performance will only gradually improve and direct debt will rise until 2017 to around 105%-115% range of projected current revenues, the Outlook is Stable.
KEY RATING DRIVERS
Expected Improving in Operating Performance
The regional government presented the 2016 draft budget in November 2015, but it was not approved, so the 2015 budget has been rolled over into 2016. Under Fitch's base case scenario, Asturias' operating margin is expected to improve to 2%-4% for 2016-2017 (1.2% at end-2014). This essentially stems from revenue growth from the improving national economy and lower interest due to subsidised state loans. At the same time, operating expenditure is likely to grow between 2%-3% on average over 2016-2017, after the autonomous community lifted cost-containment policies.
General elections were held in December 2015, and debate on a new funding system for Spanish regional governments has not yet started. Nevertheless, Fitch considers that it is still too early to assess the related impact on Asturias' IDR.
Moderately High Direct Debt
Asturias' new borrowing was covered in 2015 by state mechanisms. It received EUR560m to cover deficits and debt maturities for the year. This will result in direct debt increasing to EUR3.2bn-EUR3.3bn, or 108%-109% of its expected current revenue in 2015 (EUR3bn, or 101.5% in 2014). For 2016, Asturias' financial needs approximated at EUR510m, which means that expected direct debt would increase to EUR3.4bn-EUR3.5bn, or 109%-110% of expected current revenues. Fitch expects direct debt servicing to absorb 14%-16% of expected current revenues in 2016.
Pressure on debt servicing is moderately high, in particular with a debt calendar at end-2015 showing debt repayment for the next three years of EUR1.1bn, representing about 35.8% of outstanding direct debt at end of 2015. This is mitigated by nearly 50% of the direct debt being from the state refinancing mechanisms.
Financial State Support
The central government intensified its financial support on 23 December 2014, and Asturias benefited from 2015 of zero interest rates from the new instrument Fondo de Facilidad Financiera introduced for regional governments compliant with the stability goals. As a result, interest costs are expected to decline in 2016 to around EUR87.0m from EUR133.3m in 2014.
Regional Economy Recovering
With an estimated nominal GDP of EUR20.7bn in 2014, Asturias' economy is recovering. This is demonstrated by nominal annual GDP growing by 0.4% yoy in 2014. In 4Q15, job creation increased by 1.7% yoy. Asturias has a rather diversified economy with a more developed industrial sector at 19.3% of nominal GDP in 2014, versus 15.5% for Spain. One of the main risks for Asturias' economy is its low employment rate, which was 41.3% in 4Q15 (47% for Spain), limiting taxpayers' contributions to the autonomous community's revenue growth. With a population of 1.1 million, Asturias has a high share of elderly population, which may put some pressure on health and social services.
Direct debt exceeding 150% of current revenues, combined with a negative current balance for two consecutive years could result in negative rating action.
The ratings could be upgraded if the operating margin consistently exceeds 5% and the direct debt burden to current revenue keeps below 100%.