OREANDA-NEWS. Fitch Ratings has affirmed the Italian Region of Valle d'Aosta's (VdA) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'A' with Stable Outlooks and Short-Term Foreign Currency IDR at 'F1'. The Long-term ratings on the region's senior unsecured bonds have also been affirmed at 'A'.

The affirmation reflects the continued strong financial autonomy of VAT, due to the region's special status, underpinning its sound budgetary performance, as well as its low debt and robust socio-economic fundamentals.

The Stable Outlook reflects our expectation that VdA will maintain its special status and strong budgetary performance in the medium term, despite transitory pressures due to revised revenue attribution as defined by the national government. It also factors in our expectation of VdA's continuing moderate direct debt and wealthy economy, amid prudent management.

KEY RATING DRIVERS

Autonomy Underpins Ratings

VdA is eligible to be rated above the sovereign by virtue of its significant financial autonomy, allowing the region to maintain solid budgetary performance while coping with external pressures. The latter includes changes in the attribution of some taxes, leading to nearly EUR140m lower tax revenue in 2015, and contributions to the national budget consolidation of about EUR200m annually until 2017. The contributions will be reduced by 70% from 2018 onwards, more than offsetting falling revenue.

Robust Operating Performance

According to 2015 adjusted data (one-off revenue have been included in capital revenue), VdA's operating margin fell to 12% of revenue (18% in 2014) or EUR150m, as contribution to the national budget consolidation, and a different attribution of excise duties on beer and energy and import duties, were only partially offset by restraint on operating costs.

We expect the operating margin to return to 2014 levels, on future lower contributions to the national budget and on a rebounding economy. This recovery should cover almost 4x debt service requirements of about EUR50m. Residual budgetary flexibility (about 5% of operating revenue) and a robust balance sheet will also help maintain the region's healthy budget, including a balanced health care sector budget.

Decreasing Debt, Solid Liquidity

VdA's direct debt totalled EUR206m, or less than 20% of the budget, when net of an approximately EUR380m sinking fund for the bullet bonds and of EUR10m debt charged to the state. In its central scenario Fitch expects the stock of direct debt to stabilise around EUR200m over the medium term, despite the region's decision to self-finance its investment plan, mainly through its regional development company Finaosta. Including Finaosta's full financial debt of EUR370m (only partially drawn down for EUR95m in 2015), VdA's overall risk is around 50% of operating revenue, which is consistent with the current ratings.

Due to strong tax collection rates, Fitch expects liquidity to remain robust over the medium term, matching the region's outstanding net direct debt and fully covering annual debt service requirements. The free fund balance surplus (about EUR200m at end-2015) offers additional protection against unexpected liquidity pressure.

Solid but Small Economy

With a GDP per capita at about 40% above the national average, and 30% above the EU-28 average, VdA remains one of the wealthiest regions in Italy and Europe. Fitch expects VdA's GDP to grow 1% in 2016 (0.8% in 2015) and the unemployment rate to remain stable in the medium term at around 8.5%, below the national average (11.9% in 2015), supporting tax revenue. The economy will also be underpinned by tourism (75% of the regional economy), commerce and exports.

RATING SENSITIVITIES

An upgrade of Italy would be reflected in VdA's ratings, provided that the region continues to perform in line with Fitch's expectations.

Conversely, a downgrade of Italy, a prolonged economic downturn that weakens tax generation, or a structural decline of the operating margin below 10% could result in a downgrade of VdA's ratings.