OREANDA-NEWS. Fitch Ratings has affirmed the Region of Lazio's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB' and its Short-term foreign currency IDR at 'F3'. The Outlook is Stable. The affirmation affects the region's senior unsecured debt, including two bonds (XS0198341587 and XS0197857856) for an original amount of EUR300m.

The affirmation reflects Fitch expectations that Lazio's debt liabilities will be little changed at around 150% of revenue in 2015-2017, while moderate economic recovery and tax-rate hikes underpin the region's strengthening operating performance, allowing it to cover debt-servicing requirements.

KEY RATING DRIVERS
Fiscal Performance (weakness): Fitch estimates Lazio's operating surplus to have doubled to around EUR1bn in 2014-2015, or 8% of revenue, in line with Fitch's expectations for 2015-2017. Revenue growth was reflective of personal income tax (PIT) hikes while a 2% increase in allocations for health care stemming from a population recount offset growing pharmaceuticals costs.

Real estate asset sales and capital subsidies from the EU contributes to funding nearly EUR0.75bn of investment per annum, primarily in transport, hospitals and economic development. Fitch continues to expect Lazio to post a balanced budget over the medium term as capital spending flexibility offsets an eventual slowdown in revenue from possible cuts in transfers from the national government.

Debt (weakness): Fitch expects long-term debt liabilities to stabilise at nearly EUR21bn, or 150% of operating revenue. While the debt-to-current balance ratio is around 40 years, default risk is, however, considerably reduced due to market loans and bonds as a share being below 10%. The region's EUR15bn of subsidised, 30-year maturity, state loans contribute to the debt liabilities' extended average life to 17 years while debt sustainability is also underpinned by stable annual debt-servicing requirements for interest and principal at 8% of revenue, with a high proportion of fixed rates.

Management (neutral): Lazio has been at the forefront of Italian regions revamping the accounting system. By stripping administrative, or pro-forma, components from receivables and payables, as well as borrowing to pay off longstanding commercial invoices, bills, including those in the key health care sector, are now settled around 60 days from invoice, a sizeable improvement compared with 250 days of the past two decades.

Lazio, however, remains resource-constrained with a fund balance deficit of nearly EUR3bn, on Fitch's calculation, while high taxes limit the scope and flexibility for future rate rises. Offsetting this rigidity is Lazio's contained operating spending growth of 1% per year for its health care sector.

Economy (strength): Lazio's economy grew roughly 1% in 2015 according to Fitch preliminary estimates, with rising pharmaceuticals and car manufacturing pushing exports above EUR20bn, or 13% of regional GDP.

While depressed construction activity contributes to a high 25% share of troubled loans in corporate lending, holding back a more robust recovery, tourism and commerce support job creation. Due also to national tax allowances for permanent hires, employment peaked at 2.35 million in December 2015, the highest level in a decade. Fitch expects Lazio's economy to continue expanding by about 1% in 2016, underpinning revenue growth towards EUR15bn over the medium term, up from EUR13.5bn in 2013/2014.

Institutional framework (neutral): Fitch assesses Italian inter-governmental relations as "Neutral" to Lazio's ratings. Weak enforcement of prudential regulation aimed at preserving fiscal balance lead, at times, to off-balance sheet liabilities, such as Lazio's fund balance and health care deficits. Positively, legislation allows the repayment of financial debt in priority over commercial liabilities in case of liquidity stress while the national government intervenes with corrective budgetary measures when a subnational finds itself unable to deliver basic services.

RATING SENSITIVITIES
A weaker-than-expected budgetary performance or unexpected enlargement of the fund balance deficit could result in a downgrade.

A stronger-than-expected economic recovery fuelling budgetary flexibility, as evidenced by operating margin exceeding 10% with debt liabilities trending towards 1x of the budget, could lead to a positive rating action.