OREANDA-NEWS. Fitch Ratings has affirmed the Italian Region of Calabria's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB' and Short-Term Foreign Currency IDR at 'F2'. The Outlooks are Stable.

The affirmation reflects Fitch's expectations of low debt and the region's weak operating performance. The Stable Outlook reflects the evenly balanced risks of a weaker operating margin resulting from accelerated spending, including in the healthcare sector after years of spending rationalisation, and of a stronger operating margin following higher-than-expected budget allocations from the national government or a stronger economic recovery.

KEY RATING DRIVERS

Fiscal Performance (Weakness)

Calabria posted a 2.7% operating margin in 2015, up from 1% in 2014, in line with Fitch's expectations for the 2015-2017, when netted for a EUR100m uncollected tax for waste recycling - a responsibility the region took over from its cities in 2015. Improvement is driven by operating spending restraint in all sectors, including cuts in small hospitals and the rationalisation of the transport sector. After years of public salary freeze, which represented a third of operating costs, Fitch believes operating spending growth may accelerate to tackle past compression.

With national and EU subsidies largely funding the region's EUR7bn capex for transport, hospitals and economic development, Fitch expects Calabria's budget to be roughly balanced over 2016-2020, after adjusting for the use of earmarked reserves, which stood at EUR1.5bn at end-2015.

Debt and Liquidity (Strength)

Debt totalled EUR1.5bn in December 2015. We expect debt to remain close to one-third of current revenue, with a majority of it at fixed rates. Liquidity remains fairly strong, at nearly 5x annual interest and principal repayments, although cash reserves will decline as pre-2010 arrears (EUR375m) of the healthcare sector are paid and the region increases capital spending.

Management (Neutral)

Fitch calculates Calabria's reserves at 3% of operating revenue, despite a nearly EUR100m write-off of uncollectible receivables in 2015. New accounting rules requiring regions to balance spending with revenues are helping to streamline budget planning. Calabria's administration is forecasting a 5% operating margin per year in 2016-2018. However, inadequate administrative capacity in some of the region's healthcare units is causing commercial liabilities (EUR0.4bn) to be in arrears, in turn contributing to low business confidence.

Economy (Neutral)

Fitch expects the Calabrian economy to see a mild recovery of 0.5% this year, after stagnating in 2015. This will be underpinned by growth in EU-subsidized agriculture and increasing tourist flows (up 5% in 2015). The economy remains enfeebled by years of recession over 2008-2014, causing a 10% fall in employment and stagnant consumption. Fitch expects the unemployment rate to remain above 20% over the medium term despite a resumption of public works, such as in the transport sector, lower corporate debt and rising profit margins. The expected economic recovery in the region will have a modest impact on revenue as resources for healthcare, which accounts for nearly 80% of Calabria's budget, are allocated on an equal basis nationally.

Institutional Framework (Neutral)

Fitch assesses Italian inter-governmental relations as "Neutral" to the ratings. Subnationals with a weak economic base, such as Calabria, receive subsidies to allow for services to be provided at national standards. However, this predictability offered by revenue equalisation is offset by weak enforcement of prudential regulation to preserve fiscal balance, which at times leads to off-balance sheet liabilities.

Amortising debt structures and repayment of financial debt in priority over commercial liabilities as required by national legislation underpin timely debt servicing even amid liquidity stress.

RATING SENSITIVITIES

Relaxation of spending amid rigid revenues leading to debt servicing requirements not being covered could result in a downgrade.

Stronger economic recovery leading to a halving of unemployment, while underpinning tax-raising flexibility coupled with an improvement in the region's operating margin towards 5% could lead to positive rating action